Invoice Factoring is an asset based lending product that will lend against your businesses unpaid invoices, this allows you to leverage cash that is tied up in moneys owed.
Typically any business that offers services or products to another business can receive 85 – 90% of an invoice. Invoice Factoring can protect a company from the late payment of invoices and save the time required to chase them. It is especially useful for companies that offer credit to their clients.
Invoice factoring can be confusing. It can be hard work to know exactly what you’re paying with a factoring quotation.
Factoring providers might offer a lengthy, detailed proposal, on it there will be a long list of lots of different fees. You may see things like “arrangement fee”, “service fee” or “audit fee”.
It’s will be understandable that you will be if confused by the quote or contract you have been given. With a number of different fees and terms quoted by the factoring providers, for example:
- Arrangement fee
- Service fee
- Non-recourse fee
- Annual review fee
- Retrospective fee
- Refactoring fee
- Extended service fee
- Discount charge
- Audit fee
- Trust account fee
If you feel lost in a terminology midfield and need help understanding your factoring quote, do contact us. We would only be happy to put together a comparison quotation for you within hours.
Invoice factoring explained
Shortage of working capital and Late payments are a cause of major headaches for small business owners. This simple process of getting the cash in on time can make the difference between success and failure for the business. This is where invoice factoring can play apart and offer a workable and valuable solution.
It is a form of short term borrowing whereby a third party will buy your invoice for a fee ensuring that a lack of cash in the here and now won’t stand in the way of your future profit. This frees up both cash and time for you to concentrate on your core business activity and on making it a success.
Depending on the type of invoice finance package you choose you can either use factoring, that’s an invoice financier to manage your sales ledger and collect money owed by your customers, or invoice discounting where you will be lent a percentage of the funds owed to you to drive your business forward, before the debts have been paid and without your customer’s knowledge.
Both routes offer a useful cash injection by providing a large and fast funding stream for your business.
Specialist products available in the UK markets include Forward Finance from Bibby, this product is aimed at businesses with a turnover usually lower than £300,000 per annum. Construction Finance sector specifically offering advances against outstanding billing tranches and Selective Finance, Single Finance and Spot Finance which are all terms commonly used for raising funds against individual invoices.
Who is Eligible for Invoice Factoring Services
Factoring only covers B2B (Business 2 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. Some factors specialise in different businesses, such as the building industry, real estate or recruitment.
- However, there are some general similarities across all sectors.
- Your company’s credit rating will probably determine what percentage of the invoice you can receive.
- You will have to give evidence that your company has UK registration.
- Factors will request financial details about your business, such as turnover.
Difference between invoice factoring and discounting?
More than 40,000 UK businesses are using some sort of asset based lending and have used their invoices at one time or another. There’s no doubt that invoice financing can provide a valuable short term funding opportunity for businesses looking to improve their cash flow and, in many cases, expand their client base.
However, despite many similarities, this type of lending is not a case of one size fits all! There are two main routes to this sort of lending and understanding the differences between them is crucial when it comes to getting the right short term borrowing solution for your business.