Factoring: a simple way to balance your cash flow

Cashflow is the primary concern for many small and growing businesses. Without a well managed balance between income and expenditure on a day to day basis, companies that are otherwise profitable would collapse very quickly.

Existing cashflow problems have been compounded by the effects of the current downturn. It is taking longer and longer for customers and clients to settle their bills; indeed, recent figures suggest that the average invoice now ages for over 80 days before it is paid. This has made life very difficult for companies that rely on steady, predictable cashflow patterns - namely, those businesses that do not demand cash on receipt of goods.

Unfortunately, insisting that customers settle their invoices either in advance, or on receipt, is simply not viable for many businesses. If most of your transactions are business-to-business, there is likely to be an assumption that accounts can be settled up to 30 days after the issuing of an invoice. Payment on delivery is probably not an option. You must look at other ways of smoothing the peaks and troughs of your cashflow in order to maintain the stability of your business. Factoring is a simple way to do this.

What is factoring?

Factoring, also known as invoice financing, is a means by which businesses can immediately receive the cash from invoices they have raised. Rather than waiting for clients to get round to settling their bills, you can be sure that you will receive your money promptly - and you will be able to make more reliable predictions about your income.

The factoring process is very simple. You raise invoices as usual, passing them to your client. However, you also pass a copy of the invoice to your ‘factor’ - that is, the company with whom you have an invoice finance arrangement. The factor will then advance you a portion of the face value of the invoice; this could be as much as 90 per cent, and within as short a period as 24 hours. Then, depending on your factoring agreement, the factor or your own finance team will then chase up the invoice, ensuring that it is paid. On payment, the remaining value of the invoice will then be paid to you, less the service fee and interest.

Factors are aware of the importance of discretion, and many will therefore follow up invoices using your company’s name. If you prefer, your customers will therefore be unaware that you are using a factoring company.

Expanding through factoring

Factoring also has uses beyond easing out kinks in your balance sheets. Even during these difficult times, many companies are looking to expand. Indeed, low economic barriers to entry, combined with significant niches left by the collapse of other organisations, have meant that many companies are in a position to grow significantly in the coming months.

Frequently, opportunities for expansion materialise out of the blue and are gone just as quickly. This is particularly true at the current time when there are an increasing number of businesses available to buy as a going concern, presenting valuable opportunities to increase your market share. However, these opportunities do not last long. Cashflow is a vital element in ensuring that you are well placed to take these chances, and factoring can therefore provide ready funds to help you to grow your business.

Finding the right factor

If you are considering using a factoring service, it is vital that you find the right partner. Simply Business helps you find a factor that is sensitive to the needs of your organisation, and able to offer the level of service you require. Crucially, we also offer the flexibility you need; rather than tying you in to long contracts, some of our partners offer a rolling arrangement whereby you are free to leave at regular intervals.

Factoring can significantly increase the stability of your business, while enabling you to take advantage of opportunities for expansion as they present themselves. Simply Business will help you find a factoring partner who will understand and support your business - and make sure you get paid on time.

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