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What Is Invoice Factoring?
Invoice factoring is a financial agreement in which a business sells its invoices (also called account receivables) to a factoring company at a discount. With invoice factoring, a business gets access to immediate cash flow instead of waiting for months for the invoices to get paid.
What is a factoring company
How does invoice factoring work?
Invoice factoring works in 4 simple steps:
Factoring agreement: You enter into an agreement with the factoring company outlining the terms of invoice finance like factor rate, fee structure, etc.
Sell goods & services: You sell your goods and services to customers and invoice them.
Invoice submission: You submit your invoices to the factoring company.
You get the money: The factoring company pays up to 90% of the invoice value upfront. The rest is paid (after fee deduction) once the invoices are cleared.
Other types of factoring:
Spot factoring (also called single invoice factoring) enables a business to sell individual invoices selectively. This type of factoring gives businesses the flexibility to choose which invoices to factor based on their cash flow needs.
Reverse factoring, also known as supply chain financing, is a three-way agreement between a supplier, a buyer, and the factoring company. The factoring company pays the supplier on behalf of the buyer, offering quick payments at a discounted rate.
Account receivables factoring is used interchangeably with invoice factoring. It involves the business selling its unpaid invoices to a third party (factoring company) at a discounted rate to receive early payments. Upon receiving the invoices, the factoring company releases the bulk of payments (up to 90% of the collective invoice value). The rest is paid (after fee deduction) when the payment is collected in full from the end customers.
In recourse factoring, the business that sells its invoices to the factoring company remains liable if the customer fails to pay the invoice. If the customer defaults, the business must buy back the invoice or replace it with another. The risk of non-payment remains with the business.
With non-recourse factoring, the factor assumes the risk of non-payment by the customer. If the customer fails to pay due to insolvency or credit issues, the factoring company absorbs the loss, and the business is not responsible for repayment.
Debt factoring, also known as receivables factoring or invoice factoring, involves a business selling its accounts receivable (unpaid invoices) to a third party. The factoring company buys these invoices at a discounted rate, providing immediate cash to the business.
Advantages & Disadvantages of invoice factoring
Advantages
- Improved cash flows for businesses
- Quick & easy option to receive payments
- Selective & spot factoring allows for more flexibility and ease
- Businesses save cost & time by outsourcing payment collection to the factoring company
- Avoid taking a loan, as invoice factoring is selling an asset (invoices) at a discount
- Allows businesses to focus efforts and capital on growth opportunities
Disadvantages
- Factoring fees are relatively high, especially when you opt for non-recourse invoice factoring
- Customer relationships may suffer as the factoring company is responsible for payment collection
- Risk of non-payment from customers
- Customers & investors may perceive a business using factoring as a sign of financial instability
Is invoice factoring fit for your business?
Cash flow problems
Is your business experiencing cash flow problems due to late payments? Invoice factoring is an easy and quick way to inject cash into your business.
Monthly turnover £4,000+
Invoice factoring is best suited for businesses that sell on credit and have a turnover of £4,000+ per month.
Problems in payment collection
Invoice factoring involves outsourcing payment collection to the factoring company. If collecting payments cost you a lot of money and time, then invoice factoring could be a suitable option for you.
Sectors that Invoice Factoring covers
Retail
Mechanics
Restaurants
Bars & Clubs
Leisure Clubs
Plus Many More
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With invoice factoring, you can
Save Time Chasing invoices
Access Funds Quickly
Increase Cash Flow
Fuel growth
Invest in stock, HR, & equipment
Invoice factoring FAQs
The key difference between invoice factoring and invoice financing is this:
- In invoice finance, a business borrows money against its unpaid invoices from a third party, without selling the invoices. The responsibility to collect payments for the invoices remains with the business.
- In invoice factoring, a business sells its invoices to a third party for immediate cash flow. The factoring company takes responsibility for collecting and managing payments from customers in this case.
Invoice factoring in the UK is one of suitable funding options for small businesses. It offers quick cash flow without additional debt and it allows small businesses to outsource the payment collection to focus on high value operations.
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