Invoice factoring

With 12% of mid-sized companies owed between £250K and half a million pounds, it’s not a surprise the government is implementing measures to address the impact late invoice payments can have on businesses. 

Late payments can create a cash flow bottleneck for many SMEs, impacting their ability to grow and invest. And with many B2B businesses needing to offer 30, 60, and 90 day payment terms as a standard, business owners can be left feeling like they’re constantly playing “catch up” month to month.

Invoice factoring could offer a way to gain access to the cash tied up in unpaid invoices before the invoice due date.

What is invoice factoring?

Invoice factoring is a type of invoice finance in which you essentially sell your outstanding invoices to a lender in exchange for around 90% (this number varies depending on the lender and your business) of the money owed to you. Your clients then pay the lender directly, at which time you receive the rest of the funds minus the factoring company’s fee.

Please note that invoice finance is only as good as the strength of your debtors, customers will have to change the account they pay into, and it can be admin heavy. 

Invoice factoring is sometimes referred to as “accounts receivable factoring”. If you’ve heard the term “recourse factoring” and are wondering what it is – it’s a form of invoice factoring in which you still remain liable for the funds if the client doesn’t pay. 

Some businesses choose to opt for selective invoice finance, which is where you choose a select number of invoices to factor or discount, rather than borrowing against the entire ledger, this is sometimes called spot factoring. 

Invoice factoring vs invoice discounting

With invoice factoring, your client pays the lender, so you get the cash immediately but the lender handles chasing payments. With invoice discounting you remain responsible for chasing up and collecting the payments. Invoice discounting is more confidential than invoice factoring as you may be able to access this form of funding without you or the lender needing to inform your client. Invoice discounting is also usually cheaper.

Invoice factoring costs, rates, and fees explained

At first, you’ll receive around 80-90% of the total invoice amount. Once your client pays the lender, they’ll keep their fee, usually between 1-5% of the invoice, and send the rest to you.

There may be a setup or service fee and if a client misses the payment deadlines, you may be charged a late payment fee.

The number of invoices you want to get invoice factoring for, the total value, and the creditworthiness of the end customer can all impact what you’re charged for invoice factoring.

How can invoice factoring help my business?

If used correctly (and carefully), there can be several benefits of invoice factoring.

Cash flow

When invoices have long payment terms, invoice factoring can help business owners by providing the funds upfront, meaning businesses can still pay their rent, suppliers, and payroll even while waiting for the end client to pay.

Larger projects

Sometimes, concern over the time between invoice payment and paying suppliers can cause businesses to turn down larger projects. Invoice factoring could help in this instance.

Admin

Some people hate chasing up and collecting invoices – if you don’t like to manage your sales ledger, some forms of invoice factoring could enable you to outsource part of this task. But do be aware, depending on the invoice factoring service you choose, you may still be responsible if the client doesn’t pay in the end. 

Some possible risks or drawbacks to be aware of

All forms of finance need careful consideration, here are some of the factors you might want to take into consideration before engaging an invoice factoring company.

Customer relationships

Usually, your customers will need to change the account they pay into, the lender may run a credit check on your clients, and you will lose some of the control over your relationship with your customers. Consider if this is something you want to do.

Debt cycle

Once you’ve used invoice factoring once, it can be easy to begin using it all the time, which can quickly eat into your profit margins and become a long term expense. Think carefully about how likely you are to stop using invoice factoring once you’ve started. And if you feel you won’t, consider if there are any alternatives you might like to use to gain funding.

Unregulated

Invoice factoring is often unregulated in the UK, which means your rights as a consumer may not be as protected as you think. Before entering into an invoice factoring agreement, read over all the terms and conditions and consider enlisting support from a financial advisor or lawyer.

Alternatives to invoice factoring

If invoice factoring doesn’t quite suit your business model, here are some other possible options.

Invoice discounting

Invoice discounting is similar to factoring, except it can be less expensive and you retain more control over your relationships with your customers. If you still want to be the one to send and chase invoices, this funding solution may be for you.

Bridging loan

A bridging loan enables you to bridge the gap between funding. Think of it like this – let’s say you want to buy a new office space for your team. The seller is ready to go now, and you want to move in as soon as possible, but you need to sell your old office space, finalise the contracts, and collect the funds before you can send them over to the seller and move in. A bridging loan provides you with the cash today to buy your office space and enables you to repay the full amount when your property is sold.

Merchant cash advance

A merchant cash advance is sort of like an investment mixed with a loan. Rather than taking out money and repaying via a monthly instalment, with interest charged as a percentage, instead, you receive a sum of money in exchange for a percentage of future earnings.

Bank loan 

A business loan is an agreement between you and a lender where they extend funds and you repay them over a given period, usually on a monthly basis with interest charged. A short term business loan may be a suitable alternative to invoice factoring if you want to borrow working capital but also want to repay the funds fairly quickly. 

Find invoice factoring with Funding Options by Tide

We help connect eligible businesses to lenders offering invoice factoring and invoice discounting, along with many more financing solutions. Just click the link below and submit your information to find out if you’re eligible for our service. 

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.