UK expert advice: invoice factoring. Use sales invoices as assets. Free up finances. Boost small business cashflow.

What is Invoice Factoring and Can It Improve My Business Cashflow?

The simple answer to this question is ‘Yes’ but with potential consequences. Invoice Factoring is a specific type of finance that businesses can use to even out their cashflow and manage the ebb and flow of their finances.  In essence with this kind of funding you ‘sell’ your invoices to a third party company.  In exchange you receive a cash advance (typically around 85% of the value of your ledger) even if the invoice is not yet due to be paid. 

An Invoice Factoring Company takes on the responsibility of managing the invoices.  They will send them out to your customers on your behalf and chase any that aren’t paid.  All transactions take place through the third party’s accounts  – so payments are made to them and not into your own bank account. 

Costs and fees vary and will depend on a range of different factors, so it is vital to get advice and guidance from experienced professionals. All fees are generally deducted when the invoice is paid. This means that there are no upfront costs involved. 

International Invoice Factoring – What Happens if Most of My Customers are Not UK-based?

There are several companies who specialise in working with UK based companies whose client base is mostly from overseas.  The risk factors are generally a little higher – especially when trading with companies outside of the EU where regulations and controls are less stringent.  If you are looking for a company that deals with non-UK invoices, then you should speak to one of our specialist advisors. 

Some Invoice Factoring companies act very much like financial management agencies and manage your entire accounts in exchange for a percentage of your profits.  They will charge an agreed flat percentage at the start and keep any balance of the invoice.   Others charge you a percentage of each invoice, as well as management and arrangement fees for each individual transaction. The company will deduct the fees/costs before returning any remaining balance to you once the invoice is paid. 

It is vital that you know what you are agreeing to before you sign on the dotted line.

Confidential Invoice Factoring – Discretion Guaranteed

The last thing a cash-starved small business wants their customers to know is that they are cash-starved. Customers can be fickle and may be unwilling to risk ordering or placing deposits if they suspect that a business may be in trouble – and cash-flow problems are the biggest killers.

Most management companies take on the responsibility for invoicing on your behalf and this can be perceived as a warning sign for your customers.  There are some lenders who offer more discreet services, and our specialist brokers can direct you towards these if you don’t want your customers to know.

Advantages and Disadvantages of Commercial Invoice Factoring for Small Businesses

Invoice factoring can be a great way of raising revenue very quickly, but it is important to weigh up the advantages and disadvantages before you start. 

Here are the thoughts of some of our experts:

Advantages

• Your business cashflow becomes more fluid and you have the reassurance of knowing that there is a steady and reliable income, especially during difficult times when turnover might be low.

• You do not have to chase your invoices yourself saving valuable time. The factoring company takes on your entire ledger and communicates with your customers on your behalf.

• You don’t have to wait to get paid for a job. With some companies now offering quarterly (or even 6 monthly) payment terms, it could provide a vital lifeline to stop your business going under.

• Some sole trader businesses view the costs involved as value for money because it saves them having to employ administrative staff to do the chasing and management. The Invoice Factoring company acts more like an ‘agency’ paid to do work on behalf of the company.

Disadvantages

• The process is typically transparent. Your clients may take a negative view of you using an Invoice Factoring services.  The perception is that you are not very good with money and it may make them reluctant to offer you any subsequent contracts, fearing that you may not fulfil them.

• Invoice Factoring companies charge high fees and rates. You may find yourself giving away up to 20% of your entire profits to a third party.

• You are still liable for bad debts. Should your customers fail to pay the invoice for any reason, your own business can be put at risk if you don’t have insurance that covers you for this scenario.  Some Invoice Factoring providers offer ‘add-ons’ specifically for this purpose, but you may find you are already covered by your own policies.  Your broker should be able to advise. 

As with any other form of unregulated funding there are risks involved in this kind of finance arrangement.  Always read the contract and the small print before signing any agreement and clarify anything that you are uncertain of with your lender.