Running after invoices is undoubtedly one of the most nerve-wracking aspects of having a business. You’ve done the work, the client is satisfied, but your bank account is still waiting for that 30 to 90-day payment to come in.
In your search for a solution, you may have come across the concept of invoice factoring, but the idea of a third party contacting your customers and demanding payment can be unsettling. What if your clients believed you were in financial trouble?
This aspect is where undisclosed factoring becomes crucial. Consider undisclosed factoring as your company’s silent financial backer, a hidden force that streamlines your cash flow without revealing your business to your customers.
In this guide, we will talk all about undisclosed (confidential) factoring, so you can determine whether it’s a great solution for your business or not.
What Is Invoice Factoring: In A Nutshell
Before we dive into the undisclosed version, it is important to get a brief overview of the traditional invoice factoring process. Invoice factoring, also known as debt factoring, is a way to get an advance on your unpaid invoices.
You effectively sell your invoices to a factoring company. Then, they typically advance you up to 80% to 90% of the invoice value within a few working days. The important thing to note is that it’s a disclosed service.
The factoring company assumes responsibility for your sales ledger and contacts your customers to chase and collect the payment. When they have gathered the full amount, they pay you the remaining balance minus their service fee. It’s a great financial tool; the only drawback is the lack of control over customer communication, which is the only reason most businesses hesitate to use it.
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What Is Undisclosed Factoring?
Undisclosed factoring, also known as discreet factoring, is a type of invoice factoring specifically for businesses that need the cash flow boost but can’t afford to damage their client relationships and their public image.
When using undisclosed factoring, the factor never comes in contact with your customers. Your clients are totally unaware that a factoring company is involved because they still pay you directly. With undisclosed factoring, you get an advance on the value of an unpaid invoice, whereas you get to keep control over your credit and collection processes. It’s this confidentiality of undisclosed factoring that appeals to many businesses in the UK.
How Does Undisclosed Factoring Work?
The process of undisclosed factoring is simple but is designed to keep the role of the factor a mystery. Here is a closer look at how it normally works, step by step:
- You Generate An Invoice: You deliver goods or services to your customers and generate an invoice.
- You Provide The Invoice To The Factor: You then send that invoice to your disclosed factoring company.
- You Receive An Advance: The factor advances a set portion of the invoice value (usually 80 to 90%) into your business account.
- Your Customer Pays You: This feature is the main distinction between undisclosed and other invoice factoring solutions. Your clients will make a direct payment into your business account according to your usual payment terms. You are still responsible for chasing and collecting payments.
- You Settle Up: After the factor’s system verifies that your invoice has been paid to your account, they will release the remaining balance to you minus their service fee.
Advantages Of Undisclosed Factoring
Here are the main benefits of why a business might go with undisclosed factoring:
- Complete Discretion: This is the main benefit of undisclosed factoring. Your client will never know you’re using a factoring company, which will save your brand reputation.
- You Control Your Relationships With Your Clients. You have direct contact with your customers. Your team manages the entire collection process, including following up and asking questions, allowing you to maintain the highest level of service.
- Better Cash Flow: Undisclosed factoring instantly converts your outstanding invoices into cash, giving you money to pay for payroll, suppliers and new growth opportunities without having to wait.
- Best For Strong In-House Credit Teams: If you already have a great in-house credit management team in your organisation, this financial solution gives them an opportunity to showcase their skills without adding an external layer.
Disadvantages Of Undisclosed Factoring
No financial solution can be a perfect fit for everyone. Before you make a decision, it’s important to consider the drawbacks of undisclosed factoring:
- High Cost: There is a high price you need to pay to keep things confidential. The fees for undisclosed factoring are typically higher than disclosed factoring because the provider is not doing any of the credit control.
- You Have To Handle The Payment Collection: With undisclosed factoring, the onus is firmly on you to chase payments, so if you don’t have a strong credit management team, you will face many issues.
- The Risk Factor: Depending on your agreement (recourse or non-recourse), your business may still be at risk if a customer ultimately doesn’t pay.
Undisclosed Factoring Vs Disclosed Factoring: A Side-By-Side Comparison
Here is a simple breakdown of the differences between undisclosed and disclosed factoring:
| Feature | Undisclosed Factoring | Disclosed Factoring |
|---|---|---|
|
Customer Awareness |
The customer is unaware |
The customer is aware of the financial arrangement and directly pays the factor |
|
Credit Control |
You manage collections |
The factor manages collections |
|
Confidentiality |
Highly confidential, it protects client relationships. |
Low: the factor role is visible. |
|
Control |
You maintain full control |
You give some control to the factor |
|
Typical Cost |
Higher |
Often Lower |
Is Undisclosed (Confidential) Factoring Right For You: A Checklist
Here is a checklist; tick the situations that apply to you:
- I want to increase cash flow, but I don’t like a third party reaching out to my customers.
- My business has a well-organised, effective credit control system in place.
- Confidentiality with clients is essential for my business.
- I want to be able to use funds from unpaid invoices without changing the methods my customers use to pay me.
- I do understand, and I’m willing to pay a premium price for this confidentiality.
If you checked some of these boxes, undisclosed factoring could be a great fit for your business.
How To Find The Best Undisclosed Factoring Provider?
All factoring providers are not created equal. When you start your search, keep the following factors in mind:
- Look For Highly Qualified Providers: A few factoring companies specialise in undisclosed factors; find them out.
- Read The Contract: Know what types of terms there are; especially focus on fees, advance rates and what happens if a customer does not pay.
- Beware Of Hidden Costs: This can include setup costs, service fees or any other charge.
- Read Reviews: Look up reviews and testimonials and connect with previous customers to learn more about the factoring company.
- Use ComparedBusiness UK: The easiest way to find the perfect undisclosed factoring provider is by using ComparedBusiness UK; we help you compare different providers and choose the best one.
Compare The Top Undisclosed Factoring Providers With ComparedBusiness UK Today!
The good news is that with ComparedBusiness UK, you don’t have to spend hours researching and pitching multiple undisclosed factoring providers yourself.
We do the work for you, so you don’t have to spend hours finding the right provider. With ComparedBusiness UK, get in touch with an undisclosed factoring provider that fully understands your business today!
FAQs
Yes, since you maintain the credit control and the service is confidential, fees are generally higher than disclosed factoring.
This depends on your agreement. In a recourse arrangement, you would owe any unpaid balance to the factoring company. In a non-recourse agreement, which is less common and more expensive, the factoring company assumes all the risk associated with non-payments.
Both are confidential, so they have much in common. But invoice discounting tends to be for larger companies with a bigger turnover and a more advanced finance department, whereas undisclosed factoring is generally available for SMEs.
