What you need to Know about Invoice Factoring

There is a form of business funding available that is criminally underused by UK companies. Invoice factoring could work wonders for your business because it ensures that you receive the lion’s share of invoice money straight away instead of having to wait 30-60 days for full payment. This is a much better solution to cash flow problems than bank loans and is also much cheaper in the long term. In fact, financial experts suggest that you could save money as the overall benefits outweigh the initial fees. Essentially, you can contact an invoice factoring provider and look to sell your invoices to them. They pay you a chunk of cash up front and wait to collect the slow paying invoices.

Standard procedure is for the provider to pay the cash in two instalments. The amount you receive initially depends on a number of factors including your industry, your company’s financial situation, market risk and the credit history of your clients. The average upfront payment is 80% but in certain industries, this can be as high as 90%. The remaining payment is known as the factoring rebate and is paid once the client pays 100% of the invoice. In most cases, this means you receive 80% of the invoice immediately with 20% of the invoice paid minus the provider’s fees and charges when your client pays up.

Your company also has the option of choosing between recourse and non-recourse factoring. In recourse factoring, you are still responsible for the invoice. If one of your clients fails to pay, you have to buy back the invoice and take the loss. Generally, a provider will look to sell the invoice if it has not been paid within 90 days. With non-recourse factoring, the provider assumes the risk and will have to accept the loss if a client is unable to pay the invoice due to bankruptcy during the period of purchase. As each provider has their own method of making transactions, it is important to understand the terms of the contract before signing it. Don’t assume that one company has the same terms and conditions as another in the same industry.

An aspect of invoice factoring that some clients may be uncomfortable with is the credit checks performed on them by the provider. This involves their commercial credit being checked before they are notified that their invoices are to be factored. Any clients who are having their invoices handled by an invoice factoring company will receive a notification letter. This simply tells them that their invoices are being dealt with by a third party and also contains a new payment address. It is often the case whereby the payment is still made in your company name even though a factoring provider receives it.

Invoice factoring is nowhere near as complicated as some people try to make out. It is flexible, directly tied to your sales and provides your business with much needed instant cash. This enables you to expand if you wish without having to worry about cash flow hindering your progress.

We can offer you financial solutions to help keep your cashflow healthy. Request a quote now to find out how much invoice finance can save you.

Back to top