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Invoice factoring can be a useful method of obtaining finance for a company, but it is not a step to be taken lightly. Several points should be considered first, for example, what is the main attraction of factoring for your business, is it to improve cashflow problems and overcome difficulty in obtaining loans or to reduce business costs by eliminating your credit control staff? Whatever the reason, the first step is to determine the expense of billing and collecting.  Secondly, determine what monies are being lost as a result of investments not made due to delays in accounts receivables being paid. With these two bits of information, the financial officer of a company is in a position to make an intelligent choice when shopping for a factoring company.

Before comparing prices, any adverse effects of going down the invoice factoring route have to be considered. To what extend does the business rely on maintaining close customer relations? Occasionally, the introduction of a third party into the supplier client relationship can cause waves. Customers may question whether your company is in financial trouble or whether they will continue to receive the same first-class service when billing questions arise. If this might be a problem, then choose a type of invoice factoring called discount invoicing. With discount invoicing, your company maintains control over billing and collections, but still receives a substantial percentage of the accounts receivables upfront.

Once you known what can be saved and what can be gained, the search to find the best rates can begin. Remember that, as important as cost is, the quality of the factoring company is also a prime consideration. By using discount invoicing as a means of “testing the water” a business can benefit from trying invoice factoring without any repercussions and perhaps later ease into permitting the lender to take over every aspect of credit control.

One of the problems facing a newly formed company is that lending institutions are particularly hesitant to make new business loans. New businesses are notorious for closing at almost the same rate as they begin trading; they often lose money in the first few years. Once a business is established, obtaining loans is less of a problem, but until then new start-ups generally have to rely exclusively on internal funding. However, an alternative to business loans, known as invoice factoring, makes obtaining new business loans unnecessary.

Invoice factoring, also referred to as invoice or debtor finance, involves a lender, the factor, paying a percentage of the value of a company’s sales invoices upfront and collecting the debt from the company’s clients. After receiving payment, the factor then reimburses the company with whatever monies are left after deducting the upfront payment and any interest and charges.

In this way, rather than repeatedly having to apply for new loans, the company receives monies to cover its operating costs in a predictable and continuous manner, with the lender using the invoices as a form of collateral. The company has a regular cashflow and saves money on the billing and collecting of accounts receivable, because the job is taken over by the factoring company. Friction between slow-paying clients is eliminated by allowing a third party to handle collections and the company is able to concentrate its efforts on building a strong customer base, rather than spending time on credit control.

Any business looking to return capital to their account without waiting for invoices to be paid in full should utilise invoice factoring. It is not uncommon for as much as 95% of a business’s cash to be tied up in unpaid invoices. Think how much you could grow your business during the meantime if you only had that money. This is what factoring offers you. Factoring is best for businesses that need a quick turnaround of invoices to prevent capital shortages.

Competitive Rates

Since many factoring companies exist there are quite competitive rates. When you try invoice factoring, you only pay a small percentage of each invoice to the factoring company. The rest of the invoice is paid to you within just a few days.

Plan Ahead

When you don’t have to wait for customers to pay you, you are able to better plan your company’s finances. The only downside is a smaller margin of profit by using the factoring company and incurring those costs. A factor also helps you determine the credit standing of your customers so you can plan whether you should do business with them in the future or not. In the long run, you reduce the number of bad customers and increase the overall customer quality to increase cash flow.

Stay Protected

Many factors offer protection against bad debts. Even if your customers don’t pay, you still receive the agreed-upon percentage of the invoice. With a small fee each month, with is usually a percentage of the turnover, you remain protected and can maintain a regular cash flow no matter when, or if, your customers pay.

When you try invoice factoring, you increase immediate cash flow and can protect yourself from losses should customers not pay. While it may not be right for every business, many businesses find the protection and invoice management services useful and beneficial.

You have numerous options when it comes to factoring companies. In order to find the best possible factor for your business needs, there are several questions you need to ask about the factor. Considering this is a long-term relationship, choosing the right one the first time is important. You can access a full list of factors from the Asset Based Finance Association, or ABFA.  A good recommendation is what to look for.

Interaction With Customers

Check whether the factor company communicates with customers or not. Be sure you understand their procedures so you do not lose customers due to poor treatment. In addition, ask how quickly debts are typically collected. Slow collection rates could result in extra fees or even bad debts.

Interaction With Your Business

Ask how the factor interacts with your business. Factoring companies that stay in close contact with you are best. You always know where you stand and how debts are being collected. However, the two of you should agree on policies and procedures. Ensure you ask about agreement termination terms. Some require as much as a year’s notice and early termination fees can be steep.

Invoice factoring is used by businesses for a variety of reasons, but most commonly to increase working capital and improve cash flow.  It can be a useful source of funding for start-up businesses that have plenty of orders but find difficulty obtaining new business loans to fund them.  Similarly, any business with an immediate problem obtaining cash to meet its obligations might find a factoring service helpful.

Invoice factoring can also be a way of reducing administrative overheads, as the factoring company will take on responsibility for collecting payments due on the outstanding invoices.  Furthermore, the factoring company can help with credit management and, depending on the type of agreement, take on the liability for bad debts.

New business loans or other types of business loan can potentially be used instead to provide funds to support a business.  However, the business will need to be able to show that it is able to repay the loan.  Invoice factoring advances money against invoices raised for work that has already been completed and so there is less risk that the money will not be available to repay the loan.  It is therefore often easier to obtain than some other sources of finance.

For larger businesses that need more immediate access to monies from outstanding invoices, they need look no further than invoice discounting services.  Invoice discounting allows the business to borrow against unpaid invoices in much the same manner as business loans work.  This is usually best for larger businesses as the minimum annual turnover requirements are higher than invoices factoring services.

How it Benefits You

If you want to maintain control over invoices instead of sending them to a factor, invoice discounting allows you to manage your own sales ledger.  When you create invoices you notify the discounter of the details and they advance you a pre-agreed percentage of the total outstanding amount.  Typically, this amount is around 80 per cent, though the exact amount varies based upon the size of your company and its credit history.  The amount you can withdraw changes as new invoices are added.

Fees

Invoice discounting is not free.  As with business loans, you must pay interest on the borrowed amount.  You pay interest, which is much lower than with typical loans, until the customer pays the invoice in full.  You then receive the rest of the invoice amount minus the discounter’s fee.  This fee can be a set percentage of the total invoices or a regular monthly amount. 

You can save on interest by choosing a company that has access to multiple banks.  This will allow you to get the best possible interest rate so you have more funds coming back into your business. 

Many large businesses are already using invoice discounting.  If you do not meet the minimum annual turnover requirements for discounting, you should try invoice factoring.  The two finance solutions work in a similar manner, but factoring is better suited to small businesses. 

Do You Qualify

While some factors require you to have an annual turnover of at least £50,000, some will waive this requirement if you have an excellent credit history.  You should also deal mainly with other businesses.  Typically, factoring is not available for retailers. 

Benefits

Small businesses need capital to grow.  Gain access to outstanding invoice capital when you choose invoice factoring.  The basic principle is the factor pays you for your invoices.  They collect from your customers so you do not have to manage your own debt.  Note that some factors allow you to manage debt collection yourself.  You have access to a percentage of the invoice, usually 80 per cent, within 24 hours until the invoice is paid.  You then receive the rest, less the factor’s fee, which is a set amount or percentage of the invoice.

It can be confusing choosing a factoring company when there are so many different alternatives on the market, often with subtle differences between the services they offer.  One solution is to use a broker such as Touch Financial.  Touch Financial is partnered with a wide range of factors and can supply quotes for various invoice financing services.

It is worth contacting more than one factor before making a decision, so that an informed choice can be made.  A list of factors can be obtained from the Asset Based Finance Association.

One way to find out more information about a factoring company is to talk to some of its customers.  If a company is not willing to let a potential client talk to existing customers, there could be some cause for concern.  Even better is to obtain a personal recommendation if this option is available.  The general reputation of a company is also important to bear in mind.

Questions to consider when weighing up options are: the factor’s previous record in collecting debts; the way the factor operates; how disputes and queries are dealt with; what the factor’s general outlook is on business; does the factor have knowledge of the business’s particular industry; how does the company communicate with a business’s customers; what happens if the credit limit is exceeded; what is the notice period that must be given to finish the agreement and what is the procedure for doing so?

The answers to these points should go a long way in determining the suitability of an individual factoring company for a business’s needs.

Business loans provide companies with the capital they need to make essential purchases and investments in their business. Common options are standard loans, overdrafts, credit cards and invoice finance. Standard loans and invoice finance are probably the most closely related. While typical business loans require borrowing against the value of your business for a minimal risk investment, invoice finance allows you to borrow against outstanding debt.

How Factoring Works

Invoice factoring allows you to borrow a percentage of your outstanding, unpaid invoices. The factor retains a percentage of the invoice value as their fee. You receive the borrowed funds within a few days to immediately place back into your business. The factor collects the debt for you. It’s both a loan and debt collection service.

How Invoice Discounting Works

Invoice discounting is similar to standard business loans. You borrow a set percentage against your unpaid invoices. You pay interest on the borrowed amount until you collect the debt yourself. This option is mainly for medium to large businesses with a higher annual turnover.

Non-recourse factoring is a type of invoice factoring that might be chosen by a business.  The alternative type of invoice factoring it could choose is recourse factoring.

Non-recourse factoring means the factoring company takes on the bad debt of a business that is using its services.  It will accept specified risks in relation to non-payment of invoices by a debtor.  However, it will not insure against debts that remain unpaid because of a genuine dispute between the business and the customer.  In these cases, the business must take steps to resolve the matter and if agreement cannot be reached then any amounts that have been advanced will have to be returned to the factor.

Because the factoring company accepts liability for unpaid debts, the costs associated with non-recourse factoring are higher than for recourse factoring.  Although money that has been advanced against a bad debt does not have to be repaid, interest does remain payable on the outstanding amount until such time as payment is made.  All rights to pursue the customer, including the right of legal action, are taken over by the factoring company.