Things to Consider When choosing an Invoice Factoring Partner

Invoice factoring is a form of finance that allows businesses to raise funds by selling their debts, in the form of unpaid sales invoices to a third party finance provider. Although a business loan can provide a lump sum for investment and business overdrafts can help bridge financial gaps, factoring provides a steady and reliable cash flow.

Typically a company sells their sales ledger a third-party financial institution who collects the revenue on your behalf. Many companies use invoice factoring to improve their cashflow as well as relieving the administrative burden of credit control and clients not settling their invoices in time. You’ll receive on average 85% of the invoice value within 24 hours of selling on the debt to a finance provider and they, in turn, will pay you the balance, when your client pays, less their fees and interest accrued on the 85% paid to you. It is important to remember that the factoring company will levy a percentage of the value of the invoices it loans against and additional fees are payable if you outsource credit management. You are still liable for bad debts if the invoices are unpaid so it is advisable to obtain credit protection. Your company will need to generate a minimum turnover before factoring providers will offer the facility to you, they may impose conditions and there may be cheaper forms of credit available to your business. You should also take into consideration the relationship you enjoy with your clients and the impact losing this valuable link may have on your business.

How to choose the right factoring provider?

Most major banks and specialist finance companies offer invoice factoring, but it is a long-term commitment and you should gain a thorough understanding of the offering provided by several companies before entering into an agreement. What is their application procedure; what will be required of your organisation? Here are a few questions you should ask providers:

  • What fees will they charge? Remember to ask about interest rates for sums loaned as well as management fees
  • How much money can be leveraged against your sales ledger?
  • What is their track record for collecting debts quickly and efficiently; do they have a robust credit control procedure
  • How will the invoice factoring company maintain a good relationship with your clients?
  • Is the factoring company experienced in your market sector?
  • What period of notice do you need to give the invoice factoring company? Accepting that this is a long-term commitment
  • Are they UK-based

If you consider the benefits and the drawbacks carefully and seek professional advice, invoice factoring can increase your working capital and bridge the gap between raising and settlement of an invoice so that your business enjoys a consistent cashflow.

What are the costs?

Factoring is suitable for all business types, depending upon your turnover and the higher the value of the invoices you raise, the more you can borrow. Charges vary, but typically you will pay up to 3% over the Bank of England base rate for the money you have borrowed using your sales ledger as security, together with a service charge of around 1% linked to gross turnover.

Some finance providers offer bad-debt protection or “non-recourse factoring” whereby if a credit-approved client defaults on an undisputed debt, the factoring provider will credit you with the value of the debt up to an agreed credit limit. You will be charged a premium for this facility in the region of 0.5%.

Key benefits

  • The only asset required to secure your borrowing is your sales ledger so if your business is asset poor, it’s a good way to provide an instant boost to your cash flow
  • You have peace of mind that within approximately 24 hours of presenting your sales invoice to the factoring company, roughly 80% of its value will be in your bank account.
  • Managing your debtors becomes easier, you do not have to chase debt and you are no longer at the mercy of clients who pay late
  • You can concentrate on your core business
  • Invoices presented to a factoring company will get paid sooner than by the client
  • Invoice factoring is a flexible form of finance and as your business drives more sales, you can realise returns quickly and efficiently

Small to medium-sized businesses often do not have the human or financial resources to chase debt and cannot justify a credit controller or dedicated accounts department for the few invoices they raise each month. The key benefit of using invoice factoring is that you’ll receive a large percentage of your sales ledger upfront safe in the knowledge that the debt is being managed on your behalf, leaving you to focus on your core business and the cashflow to support your activities.