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Invoice Factoring:
Your roadmap to next level business growth


Running and growing a business is a big enough challenge as it is, without having to deal with the cash flow complications associated with outstanding invoices. Even if your debtors are good ones – ones that pay on time and in full – what more could your business be achieving if you didn’t spend so much time out of pocket, waiting to get paid?

In this comprehensive guide, we cover everything you need to know about invoice factoring, including how it can alleviate cash flow challenges and accelerate growth by putting cash in your pocket sooner.

From what invoice factoring is, to how it works and choosing the right factoring company to suit your business, discover more with this handy roadmap…


What is invoice factoring?

Invoice factoring refers to a financial agreement between a business and a lender. The lender – often known as ‘the factor’ – essentially buys the business’s outstanding invoices from them, then collects payment from its customers, deducts a fee and returns the remaining balance to the business.

The appeal of using invoice factoring is that it can significantly improve a business’s cash flow by giving the business immediate access to funds – and the approval process usually assesses the debtor’s (the business’s customer) creditworthiness, rather than that of the business itself. Invoice factoring differs from traditional bank loans in this respect.


Why would my business use invoice factoring?

Businesses that have grown quickly, or have acquired significant orders from large customers, can often struggle to maintain the cash flow needed to both serve their customers and reinvest in continuous growth. This can leave business leaders in a predicament: how do they keep acquiring customers and/or service larger orders, if they’re waiting several months to receive payment from the customers they already have?

In this scenario, invoice factoring can be used to bridge the gap between payment terms, alleviate cash flow challenges and enable businesses to invest in growth.

It is particularly beneficial for businesses in sectors with long payment cycles such as manufacturing, temporary recruitment and fast moving consumer goods.

Additionally, invoice factoring is a viable alternative for businesses that would not traditionally qualify for a bank loan, or for those that do not wish to accumulate and manage conventional debt, as invoice factoring is repaid via the customer, rather than the business itself.


The key differences between invoice factoring and invoice financing

While invoice factoring involves selling individual unpaid invoices to a factoring company, invoice financing (sometimes referred to as invoice discounting) enables businesses to leverage the total value of their outstanding invoices to raise a larger sum. Both options offer distinct benefits and drawbacks depending on the individual business need.

Invoice factoring

Invoice factoring provides a business with immediate access to cash, eliminating the wait for customer payment, improving cash flow and enabling businesses to cover day-to-day expenses such as payroll, as well as invest in larger growth initiatives.
Invoice factoring is also usually available to businesses that do not meet the lending criteria set by traditional banks, making it an attractive proposition for small or earlier-stage business owners.

Some lenders will also take responsibility for collecting customer payment, which can be a significant time and resource saving for businesses that have a small finance function.

Naturally, factoring comes with its own costs – usually a set percentage of the total invoice value – and, because the lender will collect customer payment on the business’ behalf, means customers will have to update their payment details.

The fear of upsetting a customer, either through the inconvenience of changing these details or customers’ negative perception of invoice factoring, can be a barrier to some businesses using this form of finance. However, some lenders will offer confidential facilities to resolve this concern and, generally speaking, the positive impact of improved cash flow outweighs short-term customer disgruntlement.

Invoice financing

In comparison, invoice finance leverages the total value of all outstanding invoices (or a group of outstanding invoices) to raise a larger sum. While this is still incredibly useful from a cash flow perspective, it is particularly effective where businesses have already considered a specific use-case for the cash. An acquisition for example, or the purchase of a new premise, or more extensive inventory – the types of activity that generally require a large lump sum.

Invoice finance is therefore considered a flexible method for raising significant funds, as the capital is repaid via customer invoice payment rather than amortisation and the invoices themselves are used as the collateral, rather than a personal guarantee.

With invoice finance, the business usually retains full responsibility for chasing customer payment, which means it is more suitable to those with an established finance function that can manage this accordingly.


How do I choose the right factoring company?

When choosing a factoring company, the first thing to consider is why you actually want to raise the cash.
If it is simply to alleviate cash flow challenges, working with a lender that solely focuses on invoice factoring could be the best (and potentially cheapest!) option.

However, if you have more of a growth mindset and wish to raise capital for growth initiatives (including enhancing cash flow to support that growth), working with a lender that has a broader span of working capital facilities might be wise.

Firstly, they will be more experienced at partnering with fast-growing businesses such as yours, but they will also be able to work more flexibly as you grow and require additional financial support.

Find a lender that specializes in your industry is also a good call, as they’ll have a stronger understanding of the specific needs of your business and how the macro environment impacts your sector.

You’ll also want to consider the fees and rates that each lender will charge and read testimonials from other clients.


How do I know if my business qualifies for invoice factoring?

Companies usually qualify for invoice factoring if they have unpaid invoices from reliable customers.

While factoring companies may also assess the financial stability and creditworthiness of the company itself, the focus is usually on the quality of the debtors, which means even start-ups and small businesses with a limited operating history can be eligible, as long as they have “good” customers.

The approval process is typically quicker and more flexible compared to traditional loans, which is part of the appeal of invoice factoring.


Common myths about invoice factoring

Invoice factoring is surrounded by misconceptions:

  1. Invoice factoring means getting into debt

    Because invoice factoring leverages the value of an outstanding invoice, the borrower “repays” the lender when the invoice is paid by the customer. This means the business does not need to “manage the debt” as they would with a conventional loan and there is no requirement for regular monthly repayments. While invoice factoring is technically a form of debt, it does not work in the same way.

  2. Invoice factoring means losing control of customer relationships

    Contrary to common belief, businesses do not surrender control of their accounts receivables or customer relationships when they utilise invoice factoring. Most factoring companies act as intermediaries in the payment collection process, while business owners maintain ownership and control.

  3. Invoice factoring is for businesses that are struggling

    This old-fashioned approach to finances means that many businesses do not pursue invoice factoring when it could in fact accelerate their income and enable them to access next level growth. While some businesses may attempt to use invoice factoring as a way of getting by, increasingly business leaders are becoming more savvy and realise that invoice factoring can be a great way of unlocking the capital they already have tied up in the business.


Invoice finance: An effective way to enhance cash flow

In conclusion, invoice factoring is an effective solution for businesses looking to improve their cash flow and accelerate growth. It provides a reliable source of funds by converting outstanding invoices into immediate cash that can be reinvested into the business.

If you think invoice factoring could support the growth of your business, book a chat with a member of our expert team – there is no obligation and they will be able to provide you with more information about how invoice factoring could support your specific needs.

Alternatively, apply online for a quick quote or use our FAQ section below to find out more…

Frequently Asked Questions

Invoice factoring is a financing method where a company sells its unpaid invoices at a reduced price to a third-party (factoring company). The factoring company pays an upfront amount, typically 70-90% of the invoice value and collects payment from customers, deducting their fee. It’s a way for businesses to enhance cash flow and access working capital without incurring additional debt.

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Invoice factoring can be a great solution to late payments by providing immediate payment for outstanding invoices. Factoring companies may also take on the responsibility of collecting payments, reducing the risk of late or non-payment. Lenders such as Growth Lending even offer bad debt protection as a standard on their facilities to further safeguard your business.

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Absolutely! By selling their unpaid invoices to a third-party company, small businesses can quickly access the cash they need to improve their cash flow.

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Yep! However, it’s crucial for startups to carefully review the requirements, costs, and terms set out by their lender, as these may differ from those offered to established businesses.

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The average cost of invoice factoring can vary based on business size and industry. Generally, fees range from 1-5% of the invoice amount. Creditworthiness of customers and invoice volume also impact cost.

To find the best option, compare fee structures of different factoring companies alongside the specific benefits that come with the facility.

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The value of invoice factoring depends on your unique business requirements. It offers immediate cash by converting outstanding invoices into funds, aiding in cash flow management and enabling businesses to accelerate their growth plans.

Considering the associated costs and weighing the benefits of faster growth against the fees is a good way of deciding whether it’s worth it for your business.

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