A factoring company is an organisation that buys your businesses’ outstanding sales invoices. You can receive the majority of your invoices value far quicker than the usual 30-90 days, and often in as little as 24 hours. The factoring agent then takes control of your sales ledger and the task of collecting outstanding invoices will belong to the invoice factoring company.

It’s important to note that the business factoring lender will charge a fee for the service, often a percentage of the invoice amount.

There are also downsides of working with an invoice factoring company, despite the benefits. Read on to find out more. You should assess the debt factoring advantages and disadvantages prior to applying for invoice factoring. Our expert team of consultants at Ignite Business Group can assist you on your journey.

invoice factoring company

Factoring company meaning

You may have heard that invoice factoring is like a loan. While the practice does have some similarities to loans, invoice factoring can be a more flexible option for improving cash flow without incurring long-term financial obligations.
We define a factoring company as a specialist lender who would purchase your businesses’ unpaid invoices and pay you a percentage of the amount owed upfront.

As a business owner, you will be familiar with the process of delivering a piece of work for a client. Paying for the raw materials and staff costs up front. Then issuing the invoice. Then waiting for the client to settle the invoice. You may have 30 or 60 or even 90 day terms, and as we know some clients may pay even later than this. This can put enormous pressure on cashflow. A factoring lender can really help in this situation. You get your unpaid invoices settled as soon as you issue them, (from 85-95% upfront), and the remainder once the factoring agent has collected the invoice from your client (minus their fees).

Invoice factoring does not create any liabilities or put any assets at risk, so it does not qualify as a loan. Think of it as more of an advance on accounts receivable where your business does not take on any debt.
With invoice factoring, an invoice factoring company purchases outstanding invoices and collects a processing fee once the invoice is paid. It’s very similar to any asset-based finance, but the outstanding invoices take the place of collateral.

Why should you consider using a factoring company?

The two main advantages of using a factoring agent is speed and cashflow.

  1. Factoring companies can act quickly – often giving you a decision within 24 hours – enabling you to receive funds quickly
  2. Cashflow is king. If you use a factoring company, you can improve your cashflow, by bridging the gap between issuing an invoice and getting paid.

What is business factoring

Business factoring, unlike a business loan, creates an increase in cash with money that’s already owed to your business by customers. Alternatively known as invoice factoring or invoice financing. Some people also use the term debt factoring. Your business is already owed that money, and what you are doing is leveraging that to raise cash sooner.

The basic process is simple; you sell your outstanding invoices to a factoring company that pays a lump sum. This can usually be between 70 and 95 percent of the invoice total. Then, this money will be sent to your bank account and can be used immediately for working capital.

Disadvantages of business factoring

  1. Cost – obviously there is a cost to using a factoring agency. Whilst this can be relatively small, and worth the improvement in cashflow, there obviously are still fees involved.
  2. The factoring company will be making contact directly with your clients. This may cause some issues, and even a perception that your business is somehow in financial trouble because you have had to call on a factoring agent.

So, Is Business Factoring Right for Your Business?

When considering “what is factoring”, not every financing solution works well for all businesses. While business factoring might be great for some businesses, like construction or recruitment, it may not be the answer for others. You should always aim to speak to qualified invoice factoring consultants to review what is right for you and your business. There are other options such as invoice discounting and other forms of short-term financing that may be more suitable.

Business factoring works well for business owners that need money quickly. They also need to have reliable customers whom have a history of paying invoices on time. And finally, they need to be able to afford the fees that come with selling invoices to a third party. If this sounds like your business, you might benefit from a business factoring solution.
Contact us here to discuss your options.

Invoice factoring companies

There is a wide range of invoice factoring companies. Some specialise in helping SMEs and start-ups, whilst others offer white-label customer services. Finding the best invoice factoring agent to work with your business can be a long and complicated process. At Ignite, we have contacts with all the major lenders and are able to advise which would match your business needs best.

Over 10,000 UK businesses become insolvent every year due to cashflow.

According to government statistics, on average, over 10,000 business go out of business each year due to cashflow issues.
With cashflow a major factor in the success many organizations, working with an invoice factoring company can resolve this and keep your business growing.

Maybe you need to improve cashflow to pay for day-to-day expenses, invest in extra stock or cover other expenses. Perhaps bank financing is not an option or you simply need faster access to working capital.
Are you struggling with cashflow? Contact Ignite today

Further benefits of working with an invoice factoring company

InvoiceWhat benefits does invoice factoring bring to a small business? All businesses run on cash flow, and they all have operating costs like equipment and supplies, insurance, renovations, and expansion costs.

1. Take Advantage of Opportunities
Unpredictable cash flow makes it difficult to grow your business or take advantage of opportunities.
Accessing the cash tied up in your outstanding invoices through invoice finance gives you opportunities you would otherwise be forced to miss. You wouldn’t have to pass on a big job because you couldn’t afford the staff, or you would have the funds to invest in infrastructure to take advantage of a business opportunity.
Many of your suppliers may offer more favourable terms for early payments. When adding up the savings for early payments to your suppliers versus the fees associated with invoice financing, you may be able to free up significant amounts of extra cash by making early payments to your suppliers.

2. Invoice Finance is More Flexible than Traditional Loans
Traditional bank loans are not very flexible when it comes to repayment options. They often come with penalties for early payback, have lengthy terms, and have lengthy approval processes.
Invoice finance options give you access to the cash within 24 to 48 hours, are short-term, and payments are made once your customers pay their invoice. You can also be selective with the invoices you want to use as collateral, so you can effectively increase the security of the loan by only using invoices from your most reliable customers as collateral.

3. Reduce the Chance that Late Payments will Cripple Your Business
Bad debts and late payments are responsible for a lot of businesses failing. Taking legal action is an option, but the process is lengthy and requires hiring expensive lawyers, possibly for months.
Invoice finance can help reduce the risk because they perform credit checks on your debtors and have insurance against non-payment. Of course, it will depend a lot on your agreement with invoice financing companies, as there are different types of invoice finance suitable for a range of scenarios.

4. Save Money on Admin Costs
Chasing payments on outstanding invoices can be a considerable burden on a small business when you add up the time and administration costs. The right invoice finance solution could free you up from this unpleasant task and give you more time to grow your business.

5. Access Cash Whenever Your Business Needs it
A traditional business loan comes with terms that require you to make similar repayments every month. If you suddenly find yourself with a cash surplus and able to pay off the loan in full, the early payment penalty may mean it’s not worthwhile. In short, you are stuck with the agreement for the term of your loan regardless of your financial position.
Invoice financing companies offer short-term finance that gives you fast access to cash on outstanding invoices whenever you need it. You could consider invoice financing to be a line of credit you can access whenever you need it, with amounts that can easily be adjusted on a month-to-month basis.

Best invoice financing companies

Different factoring agents offer different services and focus on different industries. Therefore, finding the right factoring company to work with you can be difficult. Let us take the example of a construction firm looking for invoice factoring.

The nature of construction industry finance is lots of large value invoices and slow turnover. Most factoring companies view the construction industry as one where small business construction firms don’t get paid quickly enough to warrant short term financing. Therefore, it can be tough finding quality invoice factoring for the construction industry in the UK.

So how do you know which is the best factoring company for your business?

That is where Ignite Business Group excel. Talk to us today to see how we can help your business with small business invoice factoring.

A sample of the top invoice factoring companies for small businesses in the UK follows – but to know which one is best for you – or one that is not on this list – contact Ignite Business Group today

Optimum Finance – best for start-ups or small businesses
Optimum has no minimum turnover requirement – which many other factoring companies do. If you are a start-up or a small business and need short-term finance, they are a good choice.

Bibby Financial Services – one of the biggest
Bibby advance up to 100% of the invoice value, and has a great track record, working across a number of sectors, and providing finance to thousands of businesses.

Hitachi Capital UK – simple fee structure and flexible
Hitachi offer a simple fee structure based on your business turnover. There are no hidden fees or setup costs which is great if you are put off by the complicated fee structure of some factoring companies. You can also opt for a 6-month trial, followed by a cancel at any time rolling contract.

Skipton Business Finance – white label service
Among the finance options Skipton offer, the one that stands out is their white label service. This is where they take control of your sales ledger, but in a confidential way that means your customers are unaware of them being involved. This removes one of the potential drawbacks of invoice factoring, and makes it similar to invoice discounting.

More and more companies are beginning to realize the advantages of having access to more flexible finance solutions. If your company is facing issues with an unpredictable cash flow, invoice factoring may be a viable solution to help you take advantage of new opportunities or invest in the growth of your business.

To find out more, contact us today.

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