What is Debt Factoring?

Stuck waiting for your clients to pay invoices? The good news is that debt factoring could be an accessible and affordable option. Waiting for clients to pay their invoices can be frustrating and, despite attempts from governments to improve the situation, it’s getting worse. Indeed, many of the businesses which fail over the next year will do so despite otherwise being in a healthy financial position. However, there could be a solution in the form of debt factoring.

Late Invoice Payments

What is Debt Factoring

What is Debt Factoring

According to figures from Xero, £141bn is tied up in late payments to businesses. On any given day the total amount owed to businesses will be £24,871 and 78% of businesses are owed money. The FSB, meanwhile, reports that 85% of businesses in Europe report being paid late. Although the EU has brought in the Late Payments Directive with a maximum payment term of 60 days, many are still being asked to accept terms greater than 60 days. Many are also being asked to offer discounts in return for early payment.

In their report entitled Pay it Forward, the FSB called on the EU to take definitive action to address the culture of late payments.

“Poor payment culture is a problem without borders, damaging small businesses in the UK and across Europe,” said FSB National Chairman Mike Cherry. “It is an issue that has persisted for far too long and the time has now come to ramp up efforts to shift the cultural dial on poor payment practices in the EU.”

These calls are nothing new. Governments have been talking the talk on late payments for some time, but action comes slowly, when it comes at all. In the meantime, businesses will need to look for alternative solutions. An increasingly popular approach is to look at debt factoring.

About Debt Factoring

So, what is debt factoring? In short it allows you to take all those unpaid invoices and debts and unlock their value with an upfront payment. You might also see it referred to as invoice financing or debt factoring. With this option, the provider will advance a portion of your debt total. This will normally be between 70% and 80% of the overall amount.

They will then take on responsibility for managing all invoices included in the deal. In other words, they will take on the work of chasing the payer and securing payment. Once this has been received, they will advance the remainder to you, minus their fee.

This has a number of advantages including:

  • Overcoming short-term cash flow problems: If late invoice payments are causing you financial problems, this can be a quick and affordable solution. You’ll have the majority of the money owed to you in your account in time to make all your payments. This can help you avoid paying your own suppliers late and damaging your credit score.
  • Reducing stress: Late payments of invoices can be immensely stressful for business owners. As such, this can be great for your own peace of mind and help you to sleep more comfortably at night.
  • No impact on your credit score: Unlike a loan this will not have an impact on your credit score. That’s because this is an advance on money which is already owed to you.
  • Bad Credit? No problem: If you have bad credit, securing a loan can be more difficult, but a debt factoring company will not take as much notice of your credit score. Although they will take it into account when setting their fees, it is not your credit rating they are worried about as much as the chances of your invoices being paid.
  • Reduced admin: As part of the service, they assume responsibility for chasing the invoices. This reduces the administrative burden on you and your team and frees you up for other things.

What makes a Business Suitable for Debt Factoring?

  • The business must have a turnover or expect a turnover of at least £75,000.
  • The customer spread must be good good.
  • Customer base must be at least three clients.
  • The business must offer sales terms on its goods or services.

How Debt Factoring can help your Business

Although there are many benefits to debt factoring, there are important things to consider. Firstly, there’s the issue of cost. As with anything else, some companies will be more expensive or offer different services than others. When setting their fees, they will assess the risks of the invoice not being paid. They will look at various factors including the client’s payment history with you, the size of the invoice and the length of the payment terms.

Many providers will also insist that this is an ongoing deal for all your invoices. As such, this is a great way to speed up cashflow, but does involve you sacrificing a portion of each invoice. When deciding whether to choose debt factoring, therefore, you should think about how much it costs and whether the ongoing cost will be worth the peace of mind which comes from faster invoice payments.

Debt factoring helps small business owners fund cash flow gaps as well has acting as a credit control department. Business can take advantage of readily available funds as well as increasing cash flow much quicker. This is because with debt factoring the funder uses their own credit control and collections department.

Apply of a Factoring Facility 

To apply for a debt factoring facility is it simple. Invoice Funding are one of the UK’s leading Debt Factoring Brokers. If you feel that factoring can support your companies cash flow and growth plans, simply complete the online enquiry.

Make an Enquiry