What is invoice factoring?

Invoice factoring is essentially where you sell your invoices to a finance provider who, in return, advances you a percentage of the value of those invoices – typically around 85%. The provider will also manage and arrange for collection of the invoices, reducing your level of admin in the process.

Managing cashflow is crucial to keeping your business afloat. But with lending to small businesses not as forthcoming as it could be, invoice finance is becoming a more attractive option for many small and medium-sized enterprises (SMEs).

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We have chosen Touch Financial Services to be our preferred broker for invoice factoring. They are the largest invoice broker in the UK and their consultants are qualified to Level 1 by the Asset Based Finance Association. 

Any legal or contractual relationship will be with Touch Financial Services. 

At a glance

  • Invoice factoring involves you selling your outstanding invoices to a specialist company who then pay you a percentage of the total (Normally around 85% of the total).
  • The invoice factoring provider is responsible for chasing the payment on your outstanding invoice. Your customer will pay the invoice factoring company direct.
  • The aim of this service is that you eliminate non-payment and all the admin costs associated with chasing outstanding bills from customers.

Why use invoice factoring?

The main reason to use invoice factoring is to eliminate the uncertainty of (non)payment. An invoice factoring company can pay you within 24 hours of receiving the invoice, while the business or person you are invoicing might not pay out until a month later, if ever. So, you don’t just reduce admin costs, but can also stop worrying about unpaid invoices.

As with anything, there are certain advantages and disadvantages to invoice finance. In conjunction with what’s been stated above, factoring allows you to reduce overheads and save time, allowing you to focus on growing your business. Indeed, knowing that you can rely on the income coming in through invoices and the related steady cash flow can make all the difference when it comes to planning for the future.

However, this does come at a cost, as the invoice factoring company will take a percentage as payment. Whether the costs saved from not having to chase invoices and having a reliable income stream outweigh the fee the company charges is a calculation that you will have to make for yourself.

Unfortunately, it’s not usually possible to use a factoring company without your customers knowing they are dealing with an external company, as they will be the ones contacting customers and receiving their payments. This means that you’ll want to use a company that you can trust and embodies the same values you do, so as not to risk alienating your current customers.

What is the difference between factoring and discounting?

While both are invoice finance products, factoring differs from invoice discounting in some fundamental ways. Most importantly, discounting does not reduce your admin costs as you are simply getting an advance (usually around 80-95% of the invoice) rather than outsourcing the invoicing itself.

On the one hand, this means that you will be the only one contacting your customers, which means you can make sure you are maintaining a good relationship. They would never know anything was happening to their invoices on your side. On the other hand, you will still be losing a percentage of the invoice without reducing your own admin costs.

Which of these types of invoice finance is more suitable for your business will depend heavily on your specific situation. As usual, it would be best to compare for yourself and see what company you’d be more comfortable dealing with.

Is my business eligible for invoice factoring?

Not every invoice factoring business will have the same criteria when it comes to whether or not they are happy to do business with you. However, there are some general requirements that you can use as an indication.

First of all, your company will need to have a certain amount of turnover before invoice factoring organisations will deem you safe and profitable; this could be around £50,000 or more, depending on the firm.

Second, consider that if your business deals mainly in cash, there won’t be much to invoice. Most invoice factoring companies require you to have credit terms of between 30 and 90 days so they don’t have to wait too long, with a sufficient amount of invoices coming in (if you’re dependant on just one or two big clients, you would likely be better off with another solution anyway).

Third, these companies prefer to work with businesses whose customers are also businesses, rather than consumers, and most will likely want your customers to be based in the UK. As to what industry businesses that use invoice factoring are in, this can vary from manufacturing to professional services and many in-between – no matter what sector you’re in, if you deal with other businesses and have multiple customers, invoice factoring could be for you.

Important considerations

If you’re eligible and invoice factoring seems like it could be for you, there are a few things to think about when comparing different companies. The easiest way to compare may be by looking at the fees. Most factoring companies will take not just a percentage of the cost of the invoice, but also charge a management fee, and there may be other charges besides this.

Another important question many may ask themselves is: would I be covered for bad debt? Unfortunately, a customer’s insolvency or non-payment could indeed affect your company’s credit rating. However, certain providers offer bad debt protection as an add-on to their services, which means you wouldn’t have to worry about unpaid invoices affecting your cash flow.

Note that invoice factoring could also affect your ability to obtain other types of finance, even if your credit rating isn’t affected. This is because it involves a certain amount of credit transferring, and can therefore make you seem less appealing when applying for a business loan or other type of funding.

Finally, if you’re worried about the trustworthiness of factoring companies, there are a few things you could check. Primarily, there’s the Asset Based Finance Association (ABFA), now part of UK Finance, which holds a list of all the members that have agreed to follow their common rules of conduct. If you want to make doubly sure the factoring company you’re considering is legitimate, look for them on the ABFA register.

If that’s not enough, you could contact other companies that have used the services of the provider you’re considering, or simply even look at what company your competitors may be using. While invoice factoring is not strictly a regulated activity, most businesses will be regulated by the Financial Conduct Authority due to their other activities.

As well as this, by using a trusted invoice factoring broker like Touch Financial you can be sure that the company you choose is not only reputable but ideal for your unique business needs.

What next?

If you’re looking for a different kind of business finance help, you may want to go to our business loansproperty development finance or bridging loans pages.

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