A business needs cash but customers don't like paying! For many companies this is a difficult equation to overcome but invoice factoring is a practical solution for a business with many customers and a sales ledger of unpaid invoices.
Invoice factoring isn't a loan
If your business sells product to another business which results in (say) £8,000 worth of invoices you may not get paid until 30 days after the month you invoice.
It gets even worse when the 30 days you are still chasing payment for another two weeks after that. All the while your own suppliers have you on hold until you come up with your own payment - and employees expect their wages paid on time too.
On paper your business might be doing well but the reality is that you have a cash shortfall.
You could approach the bank for a loan but this requires offering security through either business or personal assets but this can often take time.
So you turn to an invoice factoring company.
How to use invoice factoring
The factoring company will agree to buy your £8,000 of invoices and offer you the availability of an immediate cash drawdown of up to 85% of the value of the invoice - minus their fee percentage which could be 2% (£160) or anywhere between 1-5%.
This means you have £6,664 in your bank account to pay your own debts, wages and suppliers.
The benefits of using a factoring company is that they will handle the chasing of invoices for you as well. When the invoice has been paid by your customer, you will have the additional 15% balance (£1,176) of the invoice available to drawdown.
The best way of using invoice factoring is by utilising its best aspects like cash advance but not forgetting your duty in chasing and getting your invoices paid on time.
Fees and charges for your invoice factoring
For all the benefits of invoice factoring, customers should always be aware of what happens when your customer doesn't pay.
The factoring fee can run from anywhere between 1-5% depending on the credit worthiness of your business and the volume of sales you have. A percentage is taken because the factoring company assumes the risk of your customer not paying.
However, this risk will ultimately land back on your side of the court.
When an invoice becomes due and isn't paid, the factoring company will balance that debt amount against your current invoices. For an unpaid debt of £5,000 you will need to invoice a further £5,000 in order to have drawdown availability.
It is a double edged sword and it highlights the main difference when using invoice factoring as opposed to a loan or other form of invoice finance.
The benefits of using invoice factoring:
- Quick access to capital from your invoices helps cover any funding gap your business suffers between the time you invoice and the time it takes for customers to pay you.
- Invoice factoring is often easier for companies to get approval from, due to their fee structure and the information from your sales ledger and the value of your invoices.
- A factoring company will also analyse the creditworthiness of your customers and offer clear credit limits to their account protecting both them and you from a customer overextending or taking advantage of your offer of credit.
- You can offer extended payment terms to your loyal customers which can help your cash flow and grow your business.
- Over time you can apply for bigger credit limits on your customers.
If you think your business could benefit from invoice factoring call Access Commercial Finance and talk to one of our experts, or arrange a callback.