In today’s climate getting the sale is one thing but getting paid for your invoices can be a struggle to say the least! Growing businesses can be struck by cashflow issues. If your business is new lines of credit may not be established yet and this can lead to problems when you want to grow but can’t pay your suppliers. Getting a bank loan or setting up an overdraft facility might not be the route you wish to take. Money from previous sales not hitting your bank in time to pay your suppliers for new stock in order to fulfil future orders can constrict your business so let’s look at the advantages and the steps to consider in factoring your invoices.
What is invoice factoring?
Invoice factoring has been around for some time now and in essence allows you as a company to sell your invoices to a finance company. They in turn pay for the invoices giving you immediate funds. This then enables you to run you business and gives you a far more favourable cashflow. Another advantage of factoring is that invariably this can be setup quickly.
If you’re a small to medium size company this can be an excellent option for you to consider as the process can also allow you to off load the debt collection which can be time consuming especially if you’re the one selling and then having to make the call when the customer doesn’t pay in time.
How does it work?
An invoice is created by you for your customer with the factoring company’s bank details listed instructing your customer to pay them direct. A copy of the invoice is also sent out to the factoring company. The factoring company will then pay pretty much immediately the agreed percentage of the invoice, leaving the balance to be paid to you once received by the factoring company less charges.
For example, you raise an invoice for £15,000 and send this out to your customer with payment terms of say 30 days from invoice date. A copy of the invoice also going to the factoring company. The factoring company pay you 80% immediately so you receive £12,000. The customer then pays the full invoice to the factoring company within the credit terms and the factoring company then send you the balance and deduct their charge.
Is it the right option for your business?
On a positive note for factoring, knowing that a large amount of these funds will be hitting your bank account early enables you to plan and budget financial events that take place within your company.
There’s a lot of factoring companies out there so competition keeps their charges at an acceptable rate and gives you the ability to shop around. Also, the debt collection is dealt with by them so no need to employ someone to do this or add to your responsibilities!
A fee is charged for every invoice along with interest so it’s always good to check the small print and if your clients take a long time to pay this will cost you in charges. If you have clients that take ages to pay and extend the payment terms you have set them this will still cost your business money and if the invoice runs into bad debt territory the amount paid by the factoring company will need to be returned.
So, a lot to consider but definitely worth a look as a lot of businesses function very well using this option.