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Factoring Companies | Comparing Invoice Factoring Options
Using a factoring company can help you solve one of the biggest problems for businesses in the UK: cash flow.
Written by: Sam Hodgson
Invoice factoring offers businesses a powerful solution to cash flow problems by providing immediate access to funds tied up in unpaid invoices. By partnering with a factoring company, you can receive up to 90% of your invoice value upfront and maintain operations and growth without waiting for clients to pay.
While factoring comes with fees and some client communication challenges, it eliminates the need to rely on expensive credit options and offers a structured credit control system.
For many B2B businesses, the delay between submitting an invoice to a client and its payment is the largest contributor to poor cash flow.
The work is done, salaries must be paid, and expenses accounted for, but the money is tied up in someone else’s hands - it can be a trying time.
But invoice factoring provides an answer to this cash flow problem.
With invoice factoring, the business sells its accounts receivable (the outstanding invoices) to a third party - the factor - that releases the majority of the cash immediately and takes on the burden of reclaiming that value from the end client.
Factoring companies help you maintain a strong cash flow and grow your company without worrying about client reliability.
In this guide, we explain invoice factoring's specifics and how it works, the differences between various factoring companies, and what to look out for when comparing your options.
And also why it can be good to speak to an invoice factoring broker who can actively compare quotes from factoring companies across the market, specific for your business needs, instead of just going with the first quote you get or trying to compare products by yourself.
Key Takeaways
In This Guide
How Does Invoice Factoring Work?
The Pros and Cons of Invoice Factoring
Misconceptions about Factoring Companies
Alternatives to Invoice Factoring
Compare Invoice Factoring Companies With Us
How Does Invoice Factoring Work?
Invoice factoring is not a one-off deal, but an ongoing relationship between your business and the factoring company. Once the relationship is established, invoices can be passed to the factoring company as needed and the money cleared almost immediately.
The process is as follows:
1. Apply and Set Up
You choose a factoring company and enter into an invoice factoring contract with them. Typically, this is for a 12-month term and will incur the first two of three fees - the setup fee that covers the early administration, and the service fee, calculated as a percentage of your business's annual turnover, which pays for the ongoing management of your invoice factoring.
2. Invoice Your Customers
You work for your clients and customers, supplying them with goods and services as normal, and invoice them in the normal way.
3. Pass Invoices to the Factoring Company
Any invoices that you wish to be factored are then passed on to the factoring company, who will take over the credit control aspect of the invoicing and debt recovery.
4. Get a Line of Credit
A line of credit facility is made available based on the value of the invoices you supplied. This can be as much as 90% of the total invoice value, though your factoring contract will determine the specific amount.
While the line of credit is in use, the finance fee will be calculated daily.
5. Customers Pay Invoices
The factoring company will work directly with your clients and customers to recover the value of the invoices. They will undertake credit control without your involvement.
6. Release of Funds
The factoring company will release the remaining invoice value minus the total of all accumulated fees.
7. Repeated Use
With the factoring contract and line of credit established, you can pass further invoices as needed, repeating the process until the end of your factoring contract term.
8. Extend Contract
This can easily be done if you wish to extend your contract with the factoring company.
The Pros and Cons of Invoice Factoring
Invoice factoring has a clear advantage in that it allows you to quickly and smoothly access your money without worrying about the length of invoicing terms.
- Pay staff and other costs without delay
- Have cash available to seize opportunities as they arise
- Grow your company without waiting
- Avoid leaning on more restrictive and expensive credit, such as credit cards
- Concentrate on your business rather than invoice and payment administration
- Gain the benefits of a structured credit control system
- Improve business credit score
On the cons side, in addition to the obvious cost of fees, the involvement of an invoice factoring company can sometimes be misinterpreted by your clients, who may become confused and even upset.
This disadvantage is often easily mitigated by clear communication with customers and explaining the invoice factoring company’s involvement if needed. However, it is worth bearing in mind when considering factoring.
Misconceptions about Factoring Companies
There is some confusion about invoice factoring and factoring companies that benefit from greater understanding.
Factoring Companies are NOT Debt Recovery Agents
One of the benefits of using a factoring company is that the chasing of late invoice payments becomes someone else’s responsibility. However, a factoring company is not a full debt recovery agency, and ultimately, making sure that an invoice is paid still lies with you.
The specifics of whose responsibility unpaid invoices remain will be down to the individual factoring company and the factoring contract, so it is worth considering from the outset.
That said, the professionalism and status of a factoring company are enough in themselves for many clients to take their liabilities more seriously - often, the use of a factoring company will improve the outlook of businesses that tend to pay late or try to avoid their responsibilities!
Invoice Factoring is Not a Loan
Invoice factoring is a line of credit facility provided as an arrangement between the factoring company and your business; it is not technically a business loan.
Another form of invoice finance, invoice discounting, is a loan provided using the accounts receivable as collateral.
Read our articles on invoice discounting for more information.
Not All Factoring Companies Are the Same
Businesses looking for invoice factoring tend to lazily assume that the terms one factoring company offers will be nearly identical to another.
This is not the case.
Invoice factoring is not currently regulated by the FCA in the UK, which helps to keep its costs down and allows for a wider range of factoring services.
But this is why it is worth examining several factoring companies before making a final decision about an arrangement.
At Clifton Private Finance, we compare options from various companies that specialise in different business areas. All have varying terms and products that suit varying clients.
To learn more about how we can help, book a free consultation with a broker today.
Alternatives to Invoice Factoring
As with any form of business finance, multiple different products serve similar functions.
In the case of cash flow and invoicing management, the following offer an alternative to a factoring company that may be more suited to your specific need:
- Invoice discounting - Another form of specialised invoice finance, invoice discounting has the benefit that it is transparent and not known to your customers.
- Merchant cash advance - If your business does most of its business directly with customers through card transactions, invoice factoring is unlikely to be an effective solution. Consider merchant cash advances for B2C companies.
- Unsecured business loan - While the interest terms may be greater than the equivalent fees for invoice factoring, an unsecured business loan is a simple alternative to a factoring company arrangement.
- Credit cards and overdrafts - If your cash flow needs are short-term, easily obtained line of credit facilities such as credit cards and overdrafts may offer a simpler solution. However, be aware of high rates and the slippery slope of ongoing dependency problems.
At Clifton Private Finance, we work with all of these products and can have an open and transparent conversation with you about what's best for your business. Then, we'll compare offers from the companies that offer that type of finance.
Compare Invoice Factoring Companies With Us
Is invoice factoring right for you?
At Clifton Private Finance, we have a team of professionals available to discuss the various options available and find the right factoring company for you. Contact us today to find out how we can help you improve your cash flow situation.
To see what we can do for you, call us on 0203 880 8890 or book a free consultation below.
