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Invoice Factoring

Invoice factoring is selling your outstanding invoices to a third party. Essentially, the factor pays your customers’ bills. It is a great way for small and medium businesses to raise money.

What is Invoice Factoring?

A ‘factor’, will lend against your unpaid invoices – allowing you to leverage cash that is tied up in moneys owed. Typically, a business can receive 85 - 90% of an invoice. Factoring can protect a company from the late payment of invoices and save the time required to chase them. It is especially useful for companies that offer credit to their clients.

The Process of Invoice Factoring

When your business generates an invoice, you can issue it with instructions to pay the factor directly. A copy will also be sent to the factor, who makes an agreed percentage available to your business almost immediately. The factor will then issue statements to the customer on behalf of your company. It is the factor who will collect the money from the customer. The customer will pay the factor 100% of the invoice, and they will then forward the balance to you.

Who is Eligible

Factoring only covers business to business transactions. Each factor will have their own set of conditions that determine whether a business is eligible, so the requirements for obtaining a factoring service will vary. Specifically, qualification may depend on the company’s turnover, and requirements will vary from industry to industry. Some factors specialise in different businesses, such as the building industry, real estate or recruitment.

However, there are some general similarities across all sectors.

Your company’s credit rating will probably determine what percentage of the invoice you can receive.
You will have to give evidence that your company has UK registration.
Factors will request financial details about your business, such as turnover.

What are the Pros and Cons?

Every company has some months that are better than others, but invoice factoring can generate immediate income to stabilise cash flow. It is most often used to fund expansion of rapidly growing businesses and provide the flexibility to plug a shortfall. A loan involves taking a longer-term risk on the future performance of your business, but invoice factoring is being paid early for work that is already happening. Invoice factoring is still directly tied to the productivity of your business, so it grows with you and does not involve loan renegotiation.

Because the factor collects the money owed, it has the added advantage of reducing the administrative part of the process for your own company, and some businesses use factoring simply to reduce admin costs. For more information on the costs associated with Invoice Factoring read our article Invoice Factoring Costs.

Knowing that a factor is involved sometimes prompts clients to pay in a more timely manner. The factor themselves will usually pay within 24 – 48 hours of accepting an invoice.

However, because the factor contacts the customer directly, this is also a potential risk. That said, it is usual to agree a protocol for contacting your clients with the factor beforehand.

Sometimes factors can refuse an invoice, so clear planning is essential.
The service is not free and there can be hidden charges.
Ending a factoring agreement usually involves some kind of notice period.

Compare invoice factoring costs with Approved Index.

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Types of Factoring

If the customer refuses or cannot pay either your business or the factor will have to suffer the loss – but that will depend on how you and the factor agreed to deal with bad debts when you set out the terms of your agreement. This is usually known as recourse factoring, where you are liable for money owed, or non-recourse factoring, where the factor has agreed to shoulder bad debt.

Top Providers

A factoring company should itself be in good financial shape, so looking for an established business that is fully compliant with the FSA, is key. The contract should be clear and top providers will not have hidden charges. Good customer service is a must – if a company treats you well, they will likely be the same with your clients. When you enter into a factoring agreement, you should be able to negotiate the key points that are important to you, so look for a company that offers some individual flexibility. Factoring services will either be a single financial institution, such as a bank, or an independent provider that works with a variety of lenders themselves.

Touch Financial

Touch Financial is a well-established firm that offers a range of financial services, including factoring. A 30-day trial of the service is available to customers who are exploring the market. They are the largest factoring firm in the UK, which means that they can offer excellent interest rates.

Hitachi Capital

Hitachi Capital specialises in small and medium businesses based in the UK. Their products are simply explained and their customer support has a good reputation. They also offer a free trial period.

Barclays

Barclays provides factoring for larger companies – requiring a minimum level of credit sales that starts at £100,000 per year. They have experience across many different industry sectors.

MarketInvoice

MarketInvoice is a London based UK invoice financing business that uses auction and crowdfunding. Acting as a 24-hour facilitator, MarketInvoice can help companies to sell invoices to the highest bidder at any time. Established in 2011, MarketInvoice has quickly become a respected institution that can offer high limits, 24-hour funding and flexible finance.

Find out more about the Top UK Invoice Factoring Providers.

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