The world of business finance can seem like a language you don’t speak. If unpredictable cash flow gives you a headache, you’re not alone. The overwhelming majority of UK business owners are waiting for late payment, a situation that halts growth and causes unnecessary stress.
In such situations it becomes important to understand your financing options. While exploring financing options, you may have come across the term ‘maturity factoring’ and wondered, ‘What is it?’ Unlike standard loans, the maturity factoring process has a rather unusual take on managing the funds of your company.
We’ll take the mystery out of maturity factoring in this simple guide. In this blog, we will provide a clear example, walk you through it step-by-step, and discuss its advantages and disadvantages. By the time we’re done, you will have a clear idea of whether this financial option is the right choice for your business.
What Is Maturity Factoring?
Let’s start with the basics. Maturity factoring is a form of invoice financing where a business sells some or all of its invoices to a third-party company (the factor) at less than their value. Under this facility, the factor manages your sales ledger and chases debts with your customers for you.
The key of maturity factoring is the payment schedule. The factor agrees to pay you the amount due on your bills at a future date instead of giving you an on-the-spot cash advance. This schedule is usually aligned with your customer’s usual payment terms, such as 30 days, 60 days or 90 days. It is essentially a method of outsourcing your credit control and knowing the date at which payment will be made with certainty so you can plan your cash flow.
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Practical Example Of Maturity Factoring
Suppose you are a UK-based manufacturing company, and you send out a £15,000 invoice to one of your customers with the standard 60-day payment plan. You then sell this invoice to a maturity factoring firm.
The factor takes over the responsibility of getting your customer to make the payment. Instead of crossing fingers and hoping the payments come in on day 60, you have a solid agreement with the factor.
On day 60, whether or not the customer has paid yet, the maturity factoring company sends you £15,000 minus their service fee, say 3%, which would be £450.
So, your company on a known date receives £14,550, which helps you plan your cash flow.
How Does Maturity Factoring Work? A Step-By-Step Breakdown
It’s easier than it seems at first. Here is a step-by-step breakdown of how it works:
- You Supply Goods/Services: In the normal course of business, you either sell goods or services to make a sale and provide your customer with an invoice.
- You Sell The Invoice: Then you sell this invoice to a maturity factoring provider.
- The Factor Manages Collection: The credit control team from the factoring company takes control. They will communicate the agreed terms to your customer and handle payment collection.
- Maturity Period Begins: You then enter the matula waiting period you both consented to. This duration is determined by the payment terms on the invoice.
- Settlement Day: On the predetermined due date (also known as a maturity date), the factor pays you 100% of the invoice value minus their fee. You receive the payment even if your customer is late paying the factoring company.
Difference Between Maturity Date And Invoice Tenure
It is easy to mix up these terms; both of them refer to different things:
- Invoice Tenure: This is the combined length of your credit period you have provided to your customer. So in this example, the invoice term is 60 days.
- Maturity Date: A maturity date is the exact date on the calendar when your factoring company must pay you. It is decided on the basis of invoice tenure.
In simple words, the tenure is the term, and the maturity date is the day you get your payment.
Maturity Factoring vs Invoice Discounting: What Is The Difference?
Businesses frequently compare these two popular solutions. Here are the key differences between them:
| Feature | Maturity Factoring | Invoice Discounting |
|---|---|---|
|
Control Over Collections |
They administer your sales ledger and does the collection for you. |
You keep the control and maintain your own collections private. |
|
Customer Awareness |
The customer knows the factor is involved. |
It is kept confidential; your customers aren't aware of such financial agreements. |
|
Funding Advance |
No upfront cash advance. You get paid when the invoice matures. |
You can get up to 90% of the value of the invoice upfront. |
|
Best Suited For |
Companies that would like to outsource credit control and eliminate bad debt. |
Businesses with robust in-house finance teams that are in need of upfront cash. |
Advantages Of Maturity Factoring
Here are the top benefits of maturity factoring:
Improves Cash Flow Predictability
Maturity factoring improves the cash flow of your business. You turn uncertain cash flows into steady cheques. It makes budgeting, payroll and paying suppliers a lot easier when you know exactly when the money is going to come into your bank account.
Outsources Credit Control
Following up invoices is time-consuming and often creates uncomfortable situations. Maturity factoring outsources all of these tasks to experts so your staff can do more productive things like selling products and growing your business.
Protects Against Bad Debt
Maturity factoring protects businesses against bad debt. This is an important financial protection. In other words, if your client ends up never paying the invoice (even because of bankruptcy), the factoring company takes the hit, not you.
Focus On Core Business
When the administrative burden of credit management is eliminated, you and your team can apply that energy to things that actually grow your business, such as creating new products or strategies to acquire more customers.
Disadvantages Of Maturity Factoring
There are no perfect financial products, and it’s always important to think about the downsides.
- No Instant Cash: With maturity factoring, there is no quick form of cash infusion, as you have with other invoice finance products.
- Cost Factor: The maturity factor’s service fee eats into your profit margin on every invoice.
- Customer Relationship Impact: Some companies want to have complete control over client communication. Introducing a third-party collector could potentially change this dynamic.
Is Maturity Factoring Right for Your UK Businesses?
So, who benefits most from this model? Maturity factoring is particularly suitable for UK businesses that:
- Have consistent customers but work with long, unpredictable payment cycles.
- Wish to totally eliminate the cost and plain hard work of maintaining a credit control department in their businesses.
- Businesses that want to protect themselves from customer insolvency and bad debt.
- Favour a predictable cash flow over the instant availability of funds.
But if you want quick cash flow or to fill a short-term cash gap, it may not be the best choice.
Find The Best Maturity Factoring Providers With ComparedBusiness UK Today!
The decision to get maturity factoring is one thing; the choice of provider is another. In the UK, there are plenty of providers, all of whom have their own fees and service levels.
This is where ComparedBusiness UK comes into play. With us you can compare quotes and terms from a range of reliable UK maturity factoring providers. We help you find the right provider, which is perfectly in line with your business requirements and budget.
Turn unpaid invoices into a thing of the past. Visit ComparedBusiness UK today to find the ideal maturity factoring provider.
FAQs
No, this is the defining feature that makes it different from other financing products. There is an agreed-upon date when your invoices materialise and you get payment in your bank account.
Normally the fee will be a small percentage of the total invoice amount you are factoring. This figure may fluctuate depending on your sales volume, the credit risk profiles of your customers, and the industry in which you operate.
‘Without recourse’ is a key term; it refers to the fact that there is no risk of nonpayment taken on by the factor. If your customer is unable to pay for their invoice, it becomes the factoring company’s loss.
