What is invoice factoring?

Invoice factoring (sometimes called debt factoring) is a finance facility that allows SMEs to borrow money against the value of any unpaid invoices. Think of it as selling your invoices to a 3rd party lender, so that you don’t have to wait for your clients to pay their bills.

Under a standard invoice factoring agreement, a business will:

• Issue invoices to their clients as normal
• Forward a copy of their invoices through to the lender
• Receive a predefined percentage of the invoice’s total value (usually 80-100%) within a day, or even hours

The lender will then handle all aspects of the collection process using their own, in-house resources to reach out to your clients, and recover the unpaid debt on your behalf. Once the invoice is paid, you’ll receive the rest of the outstanding balance (minus a small fee to cover the cost of processing your invoice).

Invoice factoring agreements generally fall into one of two categories:

• Full recourse factoring agreements, where you assume responsibility for any unrecoverable funds, and pay back any money borrowed against a bad debt
• Non-recourse factoring agreements, where the lender accepts full liability for non-payment of your clients’ debts.

You’ll also be able to choose between standard factoring agreements - where all of your invoices are forwarded to your lender - and spot factoring arrangements, which allow you to select the invoices that you want to borrow against.

It is this flexibility that makes invoice factoring such a popular choice for small businesses. Particularly businesses that need to be able to react to sudden shifts in the market and/or maintain good cash flow to fuel their growth. 

What type of businesses use invoice factoring?

Invoice factoring can be used by any business that sells products and/or services to another company. That said, the full-service nature of invoice factoring means that it best suited to SMEs that don’t have their own credit control systems. For larger businesses, an invoice discounting facility may be more relevant.

Why do businesses use invoice factoring?

Invoice factoring can be a powerful tool. Particularly if you:

• Find that you’re constantly chasing late payment of invoices
• Struggle to maintain good cash flow
• Don’t have strong debt collection processes of your own

Using invoice factoring, you’ll be able to release cash from your sales ledger as soon as an invoice is issued, which means that you’ll be able to grow your business without worrying about cash flow and/or your available working capital. Businesses that use invoice factoring facilities generally find that it’s easier to grow, and easier to invest in things like staff, training or stock.

Under a standard invoice factoring arrangement, it is also important to remember that your lender takes all responsibility for the debt recovery process. This means that you don’t need to waste your time chasing unpaid invoices. Or employ extra members of staff just to help you manage your credit control in-house. In short, it’s a real time saver, and it’ll free up extra man power too.

If you’d like to learn more about our invoice factoring services, you’ll find more information on our dedicated page here.