Invoice Factoring is An Excellent Financing Option for Small Businesses
Small businesses often need to build capital. Indeed, many businesses need money to be able to make money. Find out about invoice factoring on this handy guide

Choosing an invoice factoring company for you can seem like a daunting prospect for many small business owners. To make this easier we have created the ultimate guide covering everything from how small business factoring works to the costs involved. We have also listed the UK’s top invoice factoring companies.

Factoring Companies for Small Businesses

Once you have decided that invoice factoring is the best option for your business you need to start considering which UK invoice factoring company will suit your needs most appropriately.

In addition to their fees you will also need to compare different companies based on their application process, how they evaluate your business, their reputation, and how they will safeguard your reputation with customers and clients.

For some small business factoring companies, you will need to have been in business for a certain amount of time and have a minimum turnover. You can self-select some companies based on these factors alone.

From here you will need to consider how much of the unpaid invoices that the factoring company will advance you (usually 80%) and how quickly you can get the funds (usually between 24-48 hours).

To help you consider which factoring company is best suited to you, we have reviewed three of the top UK small business invoice factoring companies. The table below contains a quick side-by-side comparison, with more information about company included further down.

Invoice Factor Feature Good for
Milestone Financial Online invoice finance calculator Businesses with a £25 k+ turnover
Clear Funding Clear and straight-forward fee structure UK companies trading for 1 year+
Bibby Financial Services Offer a 3 month guarantee promise Small businesses needing capital

What is invoice factoring for small businesses?

Invoice factoring is a way for small businesses to raise capital and improve cash flow. You sell your unpaid invoices to an invoice factoring company in return for a cash advance. The cash advance usually equates to around 80% of the invoice value which you receive within 24-48 hours of factoring your invoice. The remaining value of your invoice is paid back to you minus the factoring fees once it has been collected.

Invoice factoring is a great way for small businesses to inject cash into their business within a very short space of time.

Factoring small business options depend on a number of factors, and brings a range of advantages and disadvantages for your business. Weighing these up in the context of what options are available to you is important when choosing a factoring company.

Find out more on our what is invoice factoring page now.

How does small business factoring work?

The nature of the invoice factoring arrangement will depend on your particular invoices. However, there are some basic concepts to understand.

The factoring company will look at certain variables. They will look at the invoices you wish to hand over responsibility for. They will look at the time scales, size, and likelihood of receiving timely payment. They will also look at your standing, longevity, and reputation. These variables allow them to work out how they will mitigate the risk of taking on the unpaid invoices.

Once this process is complete, which is usually quite fast, they will come back to you with their factoring agreement and terms.

Typically, the next steps will follow the below process:

  • You sell your invoice/s to the factoring company
  • You are then advanced the majority of the invoice amount, usually around 80%
  • Once the invoice is paid, the outstanding balance (the remaining 20%) is forwarded to you, less the factoring fees

Is invoice factoring right for my business?

Invoice factoring isn’t right for every small business, but for others it can be a lifeline and a way of maximising opportunity and growth.

If you need a flexible and fast source of cash and do not want the hassle of the administration work associated with the processing and collecting of unpaid invoices, invoice factoring is an ideal solution.Although there are other ways you can raise cash, these tend to be slower to access or not available to small businesses. For example, small business loans are an alternative to small business factoring but they can be a much slower process. You may have also already ‘maxed out’ on bank or building society lending. Additionally, overdrafts do not tend to have the capacity that you require or favorable rates.

If you have reliable customers that pay their invoices by the end of the invoice period – let’s say 60 days – but your business struggles to keep up with other client requests or orders because you lack the cash flow to maintain the smooth operation of your business, then invoice factoring can provide a helping hand. Ultimately, invoice factoring can help you to grow, solve cash flow issues and take advantage of new business opportunities.

However, if you have unreliable clients with poor credit history who consistently fail to pay the invoice amount by the due date then invoice factoring may not be the best option for you as you could face late payment fees from the invoice factoring company.

Will small business factoring help my cash flow?

Yes. Small business factoring will help you to improve your cash flow via cash advances from your unpaid invoices. This is a major benefit of invoice factoring and is one of the main reasons why factoring is so popular among small businesses.

Benefits and disadvantages of factoring small business

There are a range of both advantages and disadvantages to small business factoring. Before going ahead with an invoice factoring company, you need to be sure that the benefits to your business are greater than the potential downsides.

On the plus side, factoring can:

  • Increase your cash flow quickly, without waiting for customers to pay
  • Reduce administrative pressures on your business due to processing invoices.
  • Help you grow by taking advantage of opportunities as they come, such as a new client or project
  • Enable you to make urgent purchases.
  • Reduce the time involved in the cash flow cycle, which can be limiting to small businesses who are unable to wait long periods for payment
  • Offer some protection against no, or delayed, payment, as the invoice becomes the factoring company’s responsibility
  • Remove responsibility, cost and stress of debt collection