An introduction to factoring for small businesses

Business finance is something of a scarcity in modern times. For growing companies, business loans are often hard to secure and overdrafts don’t offer a long term solution. More and more business owners are turning to alternative finance, and invoice finance in particular.

Why? Well, invoice finance is a form of asset-based lending which means that money is advanced to a company by a lender is secured against the value of its existing invoices. This makes the lending more viable for the financial institution and less risky for the borrower.

Factoring, one form of invoice finance, has several benefits for growing businesses.

  • It negates the effect of late payments, helping a business to balance its cashflow
  • It offers an instant cash injection, which can be used to help the business to grow
  • The amount available to borrow grows in line with the business’s sales, unlike an overdraft or business loan
  • The factoring company takes over management of the business’s sales ledger, which saves the considerable time and stress of chasing customers for payment.
  • It helps you maintain good commercial relationships with clients, taking away the strain of wondering whether they will pay you on time.
  • Get more favourable credit terms from your own suppliers with your ability to pay them earlier.

In the eighties, when lots of businesses were in financial trouble, invoice finance became associated with failure as it was used as a method to save companies that were in trouble. In the new economy, hundreds of thousands of healthy companies use invoice finance to boost growth with new working capital and to maintain a stable cashflow.

Key features of a factoring facility

  • It’s quick to set up
  • Receive up to 90% of your invoice value upfront
  • Receive your cash advance within 24 hours
  • Simple online transactions
  • Clear fee structure


How a factoring facility works

Each factoring company works in a slightly different way, and you need to choose the one that suits your own working style best. However, in most cases there are simple steps involved.

Step 1: You invoice your customer for goods or services provided.
Step 2: You send a copy of the invoice to your factoring provider (either online, by fax or post)
Step 3: You collect the pre-agreed advance percentage of the value of the invoice, less the service charge
Step 4: The factoring provider collects the outstanding debt from your customers
Step 5: The factoring provider credits your account with the balance of your invoice

How much does factoring cost?

Factoring is a competitively priced form of borrowing. You simply pay a service fee (linked to your turnover) to use the facility and then a pre-agreed amount of interest on the money you borrow against your invoices, which is generally taken off the balance returned to you when your client makes payment.

Who is factoring for?

There are some types of company that use factoring almost as standard when it comes to business finance. These include recruitment, export, haulage, transport, couriers, marketing agencies and manufacturers.

However almost any company which invoices customers for payment can take a factoring facility, as long as the company’s turnover is £100k or more.

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