Are you looking at invoice factoring as a way to finance your business? Typically once you have issued an invoice for work done or products supplied you will have to wait 30, 60 or even 90 days for your customers to pay. These days when most businesses are suffering from the economic downturn, waiting this long for payment can cause severe problems to even the most financially viable business. One solution to this problem is invoice factoring.
How Does Invoice Factoring Work?
Basically invoice factoring is borrowing money using the businesses outstanding invoices as security. The factor is in effect buying the debts from your business. When you use a factoring company, each time you issue an invoice it is sent to the customer and also to the factor. Typically invoice factoring releases 90%-95% of the invoice value within a day or two paid directly into your account. The factoring company is then responsible for collecting the payment from your customers within the agreed credit terms.
How Much Does Factoring Cost?
Although factoring is a loan given to the business the charges work differently than a typical bank loan where you would be charged interest plus probably a loan arrangement fee. Normally you as a business owner would pay a service fee to the factor to cover the work they do in servicing your customers; issuing statements and collecting outstanding invoices.
The service fee is generally a set percentage of your business turnover. The actual percentage amount varies between invoice factoring providers and is something you should look at carefully when choosing a factor.
In addition to the service fee there will also be an interest charge based on the value of each invoice. Again this varies according to the provider. Click here to learn more about invoice factoring and even get a free quote
Not every business is suitable for invoice factoring. Most of the larger banks and finance companies who act as factors will require that the business has a minimum annual turnover before it will provide this service. For example the HSBC will only act as factor for businesses with an annual turnover in excess of £250,000.
How Factoring Could Work For Your Business
If your business is a small logistics company where you are normally paid 30 days after invoicing, you will probably find that this restricts your cash flow as fuel, wages and other expenses will have to be paid within that 30 day waiting period. Using factoring you would receive at least 90% of the invoice value in your bank account with one or two working days, allowing you to pay your drivers and pay your fuel bill.
Perhaps you run a recruitment agency to supply temporary workers to local businesses. You need to pay your staff weekly but the companies you supply only pay once a month. You could use invoice factoring to bridge the gap between paying out weekly but only being paid monthly.
There are many circumstances and situations where your UK business would benefit from invoice factoring. As with any financial decision it is not something you should rush into but by shopping around among the many financial institutions that offer this service you should be able to find one that is a good fit for your business.
If you would like to know more about Invoice Factoring in your business or get a free quote please click on the link to our invoice factoring pages. Or please leave comments and ask questions below