Invoice factoring is an invoice finance agreement where a business sells its invoice (accounts receivable) to a third-party factoring company (the factor). It is a type of debtor finance and is sometimes referred to as ‘factoring’, ‘accounts receivable factoring’ and ‘debt factoring’. The factoring company then provides the credit control service to recover payment of the unpaid invoice.
Invoice Factoring allows you to release cash from your unpaid invoices quicker than having to wait between 30 to 90 days – and sometimes up to 120 days – for your customers to pay you.
In addition, we handle your credit control, allowing you to concentrate on other areas of the business instead of chasing up late payments.
As your business grows, so does the available funding. With Invoice Factoring you don’t need to negotiate new terms as your flexible funding line increases with your turnover.
Find out more about how our invoice factoring products help many small to medium sized businesses by releasing cash from unpaid invoices, whilst leaving the chasing of late payments to one of our in-house specialists.
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The needs of SMEs tend to vary according to growth stage and industry. To help you work out which type invoice factoring will suit your business, here is a brief guide to the five main options:
This is a type of invoice factoring facility where you take responsibility for any unrecoverable funds. Imagine that you factor (or sell) an invoice worth £5,000 but your client defaults on the debt, and your factor cannot collect the money owed. Under a recourse factoring arrangement, you would then need to repay the £5,000 loan so that your factor wasn’t out of pocket.
Recourse factoring accounts for approximately 90% of all invoice factoring arrangements, because it allows factors to lend money without shouldering the risk of bad debt. Sole traders, contractors and start-ups tend to be offered recourse factoring arrangements too, but it’s worth remembering that recourse factoring facilities can still be immensely beneficial in the sense that they free up read cash for expansion, and allow you to take full advantage of your factor’s in-house credit control systems.
Under this arrangement, the factor assumes full responsibility for any bad debt, which means you won’t have to repay money leveraged against an unrecoverable invoice. These agreements tend to be rarer, and the risks associated with this kind of lending mean that factors normally charge more for non-recourse factoring.
Using a whole turnover facility, you will factor every invoice as soon as you issue it; guaranteeing a steady flow of ready cash, and providing you with the resources needed to grow your business. Whole factoring agreements tend to be used by sole-traders, contractors, start-ups and SMEs that value positive cash flow, and don’t have their own credit control processes.
Selective factoring allows you to choose which invoices you finance. This gives you greater control over the credit collection process, and allows you to avoid unnecessary fees if you have clients that can be trusted to make good on their invoices within the stated payment window. However, selective factoring does require some internal credit control, so this type of factoring tends to be less suitable for sole-traders and contractors.
Spot factoring facilities allow you to finance a single invoice. These facilities are normally used in emergency situations, and tend to be quite expensive.
If you have decided to choose invoice factoring, or you are simply in the research stage and looking at all of your options, one of the big questions you will probably have is around the fees and charges related to an invoice factoring solution. We have created this quick video guide to explain some of these fees, the terminology and what you might be expected to pay.
Invoice factoring (commonly know as debt factoring) allows you to borrow money against the value of your unpaid invoices. It’s a type of asset-based business finance that’s prized by small- to medium-sized businesses that need to maintain good cash flow.
At first glance, invoice factoring may look like an ideal solution. Particularly if you:
After all, an invoice factoring facility allows you to outsource all aspects of debt recovery and (more-importantly) provides you with a cash advance within 24-72 hours of issuing an invoice.
Invoice factoring does have some disadvantages though. It can affect your company’s image, it does take away some of your control, and you will often have to take responsibility for bad debt too. These disadvantages may not outweigh the advantages associated with being able to exchange your invoices for ready cash, but they are worth considering. Particularly if you’re working with a small pool of clients, or want to retain control over the credit collection process.
Using an invoice factoring facility, you will:
There are some disadvantages too though. Your clients will be informed that you’re using an invoice factoring service, and your factor will contact them to collect on factored invoices which means that:
It is also important to remember that most invoice factoring agreements are recourse arrangements, which means that you will be responsible for any unrecoverable invoices.
Invoice factoring enables a business to quickly raise money and receive an immediate cash injection, improving its liquidity position by selling invoices to a factoring company. Invoice factoring is a good idea for companies who want to relieve their business from the time it takes to chase up unpaid invoices, as well as allowing them to immediately improve their cash flow and focus on other areas of growth for the business.
There are a number of reasons companies may utilise invoice factoring services for their business; primarily, factoring helps companies ease their cash flow concerns by receiving payment of invoices immediately. Slow paying customers can put a strain on cash flow and factoring with Hitachi Capital Invoice Finance gives businesses an option to receive cash in 24 hours, as opposed to waiting 30, 90 or even 120 days to get paid by customers.
Technically speaking factoring is not considered a loan as it is a purchase of accounts receivable. The factoring company purchases future receivables (invoices) and provides the business with a percentage value of the invoice upfront. The remaining balance minus a fee is then paid to the business once the invoices have been settled. Rather than a business waiting a significant length of time for an invoice to be paid, invoice factoring enables a business to access cash quickly and easily.
The cost for invoice factoring is split in to three key areas. A set up fee for the administration of establishing the facility. The service fee covers the management and admin costs related to your account and is charged as a percentage of your gross turnover.
Finally the finance fee is the cost of the money you draw down and is charged daily against your outstanding balance.
All reputable finance providers will be transparent about the fees and costs related to the facility prior to signing the agreement.
The process of invoice factoring involves a factoring company taking ownership of a businesses unpaid invoices. The factoring company releases a percentage amount of the unpaid invoice to the business straight away and then proceeds to take ownership of collecting the invoice payments. The factoring company chases the debtor and on payment of the invoice will release the remaining funds back to the business.
Invoice factoring provides a business with immediate funds, improves liquidity and mitigates cash flow issues arising due to unpaid invoices.
Invoice factoring is not currently regulated by the Financial Conduct Authority (FCA). An industry-wide code of conduct is provided by the UK Finance to ensure a fair service and integrity is provided for invoice factoring services. It is widely accepted that the regulation of the invoice finance sector would contribute to the increasing costs of its services. Therefore, this enables invoice factoring providers to remain competitive and provide a low-cost solution for businesses seeking to utilise invoice factoring services.
Invoice Factoring has become a popular method of business funding. For businesses who tend to experience longer payment terms with regards to their invoices, invoice factoring can be the solution as it is designed to provide working capital for businesses instantaneously. Moreover, it can be a beneficial service for all types of businesses seeking immediate access to cash without suffering cash flow issues from the 30 to 90 days it takes for the payment of their invoices.