If you run a small business, then you know how important it is to get paid on time. But what happens when your customers don’t pay you right away? That’s where a bank factoring company can help.
A bank factoring company buys your invoices at a discount and gives you the cash right away. Then, when your customer pays the invoice, the bank factoring company gets paid back. This arrangement gives you the flexibility to get the cash you need when you need it without having to wait for your customers to pay.
In addition, a bank factoring company can provide other services, such as credit protection and collections, that can help you manage your accounts receivable. As a result, a bank factoring company can be a valuable partner for any small business.
A bank factoring company can be a better suited for some businesses. Once you have made the decision that Invoice Factoring is a good fit for your company, the next thing to do is identify the best factoring company for you. There are a huge range of providers for you to choose from, but how do you know which is the best fit?
This guide will help you to understand the differences between an independent factor and a bank factor, while revealing that one may offer your business more benefits than the other.
What is a bank factoring company?
A bank factoring company is a part of a high street bank that provides invoice factoring to businesses as part of its commercial arm.
Factoring is an exchange between a business and a third-party (the factor) which gives fast cash flow in return for accounts receivable and/or different assets. A business can utilise its invoices as leverage or sell accounts receivable to the factor for cash. Contingent upon the course of action, the money is either discounted or reduced by expenses charged by the factor.
A bank factoring company involves similar strides as a more traditional factor, however, requires the factor to be a regulated bank. You should be aware that there are many subtleties and contrasts between traditional financing companies and banks that offer factoring. Every provider has its own particular manner of characterising the kinds of factoring available.
Types of factoring banks offer:
Asset-based lending – This is a loan that’s secured by business assets. The collateral attached here is either accounts receivable, balance sheet assets, or the inventory. Asset lending is similar in many ways to a revolving line of credit, so the business can borrow from assets on a constant basis to cover any expenses it needs to.
Accounts receivable financing – This is where a company sells the value of its invoices to a third-party factor at a discounted rate. In this instance, the third-party processes the invoices and the business receive funds due to the expected money from the debtor. This works in a similar way to a line of credit.
Invoice Factoring – The third offering, and it incorporates businesses selling invoices to the third-party (a factor). The factor would give the business a percentage of the total value of invoices and collects payments from the business’ late paying client. Once the invoice has been paid by the client, the factor will pay the business the remainder of the cash collected, minus a transaction fee.
The main benefits of Factoring
Factoring isn’t actually a loan, and therefore no liability is reflected on the balance sheet. It helps to establish a steady cash flow and diminishes the waiting period for the accounts receivable of a business. The factor will manage the invoices implements credit reviews of the clients for the business. The factor gives out funds against invoices and collects cash that is owed by clients of the business venture.
This allows the business to have more time on its hands, allowing it to focus energy on sales, market expansion, and any other elements that would prove profitable with enhanced levels of focus.
Why factor your invoices?
- Money is advanced to the business before clients pay the invoice for goods received.
- Factors provide credit control – the collection of funds is managed by the factoring entity.
- Factoring provides capital while the business has open invoices.
- Factoring is not a loan since the invoices/accounts are purchased by the factoring entity. They do not show on the books as a liability, so this reduces balance sheet debt.
- Companies that experience seasonal fluctuations in their business have periods of insolvency; factoring could help with this as it is a means of acquiring positive cash flow based on money owed by customers.
- Fast access to funds with invoice factoring – the cash will be available within 48 hours after an invoice is generated.
- You will receive relief from debt collection.
- You will have no debt to repay.
You have a lot of options with factoring providers
More or less anyone can start a factoring company, as there are limited barriers to entry in the industry. With that being said, some factoring establishments are far better than others. This is an area in which you must tread carefully, so you do not end up signing an agreement with a sub pare venture.
You should take the time to research the different factoring partners available to you. You have two main options to choose from: both bank factoring companies and independent factors. To ensure you make the right choice, you should do further research, even after reaching the end of this article.
Independent vs bank factoring
We will now summarise the main differences, which is essential as the overall goal of invoice factoring is the same. Therefore, choosing the right provider such as Royal bank of Scotland for your business venture is absolutely crucial.
Independent Factoring company:
These types of factoring organisations work alongside business ventures that require a quick acceleration of cash flow but may have been turned down for a bank loan. If a business has creditworthy customers, it may be eligible to qualify with a factor, regardless of whether it can for a bank loan.
Although, an independent factor must first borrow from a third-party usually a bank like Barclays so that it can fund invoices. This can unfortunately increase the level of risk involved and costs for your business venture. It can also reduce efficiency.
Bank Factoring company:
Bank factors, on the other hand, provide all the same advantages as independent ones, but also offer further flexible benefits, such as the following:
Easier transition to bank loan
Bank factors regularly work with those considered to be outside of the traditional credit box. Many of the businesses utilising this form of funding will have been turned away by high street banks for a commercial loan. However, they remain very strong candidates for working with a bank that offers factoring, or accounts receivable financing.
You will often find that businesses working with a bank-owned factoring company, have an easier time getting hold of a commercial loan in the future.
Banks are obviously a more secure option and provide a sense of financial stability for clients. A business’ customers are entirely important relationships, and a bank offers a degree of solace not found in independent alternative financing companies. Customers rest easy thinking about interacting with a bank than a new or obscure business entity.
Furthermore, since the bank has its own funds, it can offer the business highly competitive rates. Unlike many independent factoring companies who work with multiple funding sources, a bank is a direct source of funds, which diminishes the need of a middleman.
Factoring is a popular answer for cash flow issues and is best utilised during development periods or when the accounts receivable is large. The business benefits since the time between the delivery of products and funds realised is short. The business is eased of the weight of pursuing debt and can focus on other relevant issues that are perhaps more pressing.
Do banks do invoice factoring?
Yes, in the UK all the leading banks provide invoice factoring for their business customers.
What is bank invoice financing?
Bank invoice financing is a form of short-term borrowing in which your business borrows money against the amount due on invoices you've issued to your customers.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.