Invoice Factoring is a type of business finance which releases cash currently tied up in outstanding customer invoices. This business solution is ideal for helping fund expansion plans, improving your cashflow and collect payment from your customers.
There are two main types of funding options: factoring and discounting. With factoring the finance provider will fund and carry out credit control. Invoice factoring is simply a way to release the money owed in funds that’s tied up in your unpaid invoices. Instead of waiting for your customers to pay, you borrow against the money you’re owed and is a type of debt financing. Not only do you get the money you’re owed without the wait, we chase up your outstanding sales ledger for you with debt collection services.
What is Invoice Factoring?
Invoice factoring is a way for UK based businesses to raise money by selling invoices owed to your business to a third party factoring company at a discount. Factoring usually includes your own accounts receivable credit control, this is where the lender chases unpaid invoices up on your behalf. UK factoring companies help release cash from your debtor book. Here is everything you need to know about invoice factoring.
Invoice Factoring in the UK is where a factor or lender buys all or some of your outstanding invoices. The lender will then advance you up to 90% of their value and repays you the remaining amount, minus a commission plus interest on the advance when the accounts are settled. The amount a factor is willing to advance will depend on the standing of the debtor.
You will be granted a higher percentage on funds owed to you from a UK blue-chip company than from a sole trader. The invoice factor then administers your sales ledger, taking responsibility for the debts. Account statements to your client and chasing up outstanding payments will also be the responsibility of the lender. Invoice Factoring is available to any business in the UK that trades with other businesses.
How Does Invoice Factoring Work
In general, for an invoice funding transaction to happen, there must be a factor, a debtor and an unpaid invoice. The factor is the financial institution that offers or agrees to buy business debt or unpaid invoices. The debtor is the client who owes money to a business in the form of an unpaid invoice. Lastly, the invoice is the document that shows transactions between a business and its clients.
Here is how it works; the business raises an invoice for goods/services sold on credit to another commercial entity and then presents the invoice to a factoring company for payment (advance payment). Most factors make payments within 24 hours upon receiving the outstanding sales ledger. The business will then receive up to 95% of the unpaid invoice amounts. once payment is made the factor will collect the full invoice amount owed to the business when the invoices become due for payment, deduct its service fee and interest, which typically vary from one factoring company to another, and then submit the remaining balance to the business. It is important to note that customers that do not pay on time may affect a business’s ability to access invoice factoring services. The factor we ensure it holds the same relationship with your customers as you do, and will not do anything without your provision legally.
We recognise that money is the lifeline of any type of business, using our expertise and experience in cash flow solutions enables us to establish inexpensive centres that are structured in a manner that will certainly meet your company needs. Most companies just need their outstanding invoices paying on time as most of the businesses working capital is tied up in their sales ledger, this is where factoring comes in to its own with chasing late payments.
Our purpose is to guarantee that your company has a debt factoring facility that is fully enhanced. That means your prices are reduced and the money produced is maximised. We do this by taking into consideration the complete costs rather than just the headline prices of invoice factoring and by taking into consideration any restrictions that could lessen the funding generated. Our years of experience of helping companies like yours enable us to do this successfully to make sure that you the customer save both time and money. making it a great solution for businesses.
Small Businesses benefit greatly from recourse factoring as most offer bad debt protection, should you not get paid or a company goes in to liquidation on you, you still get paid! Factors include this on most of their funding packages
Most invoice factoring companies in the UK pay in two instalments, the first covering the bulk of the receivables. The remaining amount usually 5-10% when your client settles their invoice, minus any factoring fee. A simple process of the invoice factoring agreement are as follows:
- You submit details of your invoices to the factor to determine if you are eligible for the factoring facility.
- The invoice factoring company will then assess the credit scores of your clients and will then offer their quote.
- Once you agree to the terms and conditions, the factor will advance you the money.
- Collection of outstanding invoice amounts with your customers will commence.
- Once the outstanding invoice amounts has been collected, the factor will pay you the remaining balance of your money, minus their fee.
Factoring only covers business to business transactions. Each factor will have their own set of conditions that determine whether a business is eligible, so the requirements for obtaining a factoring service will vary. Specifically, qualification may depend on the company’s turnover, and requirements will vary from industry to industry.
What are the Invoice Factoring Costs?
Invoice Factoring costs in the uk are entirely determined by your lender. They vary due to different factors that influence your invoice factoring providers risk of taking you on as a client. Therefore, if your business is determined to be low-risk and you have a high volume of invoices to be factored, you will generally receive lower rates. Invoice Factoring providers also offer additional services such as Bad Debt Protection for an additional cost, as they aren’t included in your factoring solution.
On a related note, Invoice Discounting solutions tend to be less expensive because you use a lower level of service from your provider, since you collect and manage your debts internally.
When determining your costs, Invoice Factoring providers take into account the following variables:
- Invoice Volume and Size
- Customer Creditworthiness
- Business Stability
- Invoice Payment Terms
Service fee: £10,000 x 1% = £100
Availability = 85% of £10,000 = £8,500
Discount fee (cost of borrowing): £8,500 x 4.15% (includes bank base rate) = £352.75 (annual rate) divided by 365 days = 0.966p x 30 days = £28.993
£100 + £28.99 = £128.99 to borrow £8,500 over 30 days.
What’s the Difference Between Invoice Finance and Factoring?
Invoice finance is the common terminology for the whole accounts- receivable finance sector. Factoring and discounting are therefore types of asset-based financing, covered by the umbrella term ‘invoice finance’ and they both share common principles.
Is Invoice Factoring a Loan?
Factoring is not considered a loan, but a form of asset backed finance. The key point of difference with a loan is that neither part issues or secures debt as a part of the transaction.
What’s the Difference Between Invoice Factoring and Discounting?
The key difference between invoice factoring and discounting is that while invoice discounting allows the business to retain control of its sales ledger and invoice collection, factoring gives the invoice finance provider that role.
Invoice Factors will manage their own credit control, and chase customers directly for the settlement of invoices.
Some businesses may be concerned about the factor taking over the credit control for their business ledger, due to the relationships with their clients and customers. Some factoring companies will have very little contact with your debtors and can in some instances, provide a service to set up a separate bank account which they assume control of, and that is under your business name. If the factor does contact your clients or customers, they can say that they are your billing department to help keep relationships as intended.
What Types of UK Companies use Invoice Factoring?
Factoring is particularly suited to UK based companies in areas such as:
Business that provides services or goods to other businesses and gives customers credit terms of 30-90 days. Factoring can solve the problems associated with slow payment. It also saves cost due to not having to employ a credit controller. The credit control and collection service that comes with Factoring is included within the factors quotation so there is no extra cost to this service.
Specialist UK Invoice Funders
- Hitachi Invoice Finance provides award-winning invoice factoring and discounting to small and medium sized UK businesses. They offer easy to understand cash flow solutions, with good customer support, trial periods, price promises and a focus on friendly service.
- Bibby Financial Services are the UK’s largest independent factoring company. For an 85% return on the cash tied up in outstanding services, Bibby offer debt chasing, credit control and sales ledger management, which can be kept completely confidential (confidential invoice discounting). They offer help with overseas debt (international factoring) as well as bespoke packages for all industries.
- Ashley Business FinanceFounded in 1993, Ashley have provided straightforward funding solutions to SME (Small to Medium sized Enterprises) in the UK for over 20 years.
- Close Brothers Invoice Finance is an invoice factoring company catering for medium to large sized businesses.
- Market Invoice has helped thousands of UK businesses to unlock funding for growth. They offer a range of invoice discounting solutions.
Am I eligible for invoice factoring?
Eligibility criteria for invoice factoring differs from a standard bank loan. Each factoring company has their own requirements, but general speaking when you sell your invoices to a third party you should:
- Your business should be registered in the United Kingdom
- The business owner over the age of 18
- Your customers have a solid payment history and credit record
- A minimum volume of invoices (the minimum varies between lenders)
During the application process, it’s likely that you will also be asked for your business’ trading history, 12 months of business bank statements and related documents to give the lender a better overview of your business and whether you will be able to pay back money owed. Factoring companies will often favour businesses that are able to provide them with:
- A detailed list of their customers and clients
- Financial records for auditing purposes
- The outstanding invoices that need to be funded
How Does My Business Get The Best Factoring Deal
We are here as the UK’s leading Invoice Factoring Broker and will ensure you get the best deal possible for your business. As the popularity of invoice finance has increased, so has the number of providers competing for your business. There are now more than 50 invoice factoring companies in the UK.
Since all businesses are different, each borrowers situation will require a unique accounts receivable financing solution. Some lenders are best for speed, others for customer service, others for current rates. As we understand the market we will ensure we find you the best lender to fit your business.
Simply complete the online enquiry form to get started.
Frequently asked questions
What is invoice factoring
Invoice factoring is a type of business finance that allows businesses to raise money by selling invoices to a factoring company at a discount.
How much is invoice factoring
The cost of invoice factoring is calculated by combining both the discount rate and the service fee.
Is invoice factoring regulated in the uk
Invoice finance industry is not currently regulated by the Financial Conduct Authority (FCA) in the UK. With this in mind you need to exercise due diligence with any provider you may choose, investigating the possibility of hidden fees which may not be immediately evident.
Is factoring invoices a good idea?
Factoring of invoices is a good idea for small business, compare to a business loan, invoice factoring is more flexible and can be in place within five working days.