Understanding invoice factoring
Where businesses sell their accounts receivable (invoices) to a third party (a factor) at a discount, in order to obtain immediate cash.
What is invoice factoring?
Invoice factoring (also known as debt factoring) is a form of invoice finance where businesses exchange certain or all pending invoices with a third party to boost their cash flow and revenue consistency.
In this arrangement, the factoring business will provide a substantial portion of the invoiced value upfront and subsequently takes on the responsibility of retrieving the payment directly from the client.
What is a factoring company?
A factoring company provides the service which recovers the payments of your unpaid invoices, allowing you to release the tied up cash within 24 hours.
With Novuna as your factoring company, you are also eligible for a credit protection solution which protects businesses from their customers potentially not settling their invoice payments. This acts as added security when engaging in invoice finance transactions.
How does a factoring service work?
- Supply the goods: Supply your customers with goods or services and invoice your customers as normal.
- Factoring companies will handle the credit control: The factoring business will release up to to 90% of the raised invoice value. Your customers will pay the factoring company directly and chase payment of the invoices on your behalf.
- You receive the money: Once the customer settles the invoice, the finance company will release the remaining invoice amount to you minus the relevant fees.
Other types of factoring
The needs of SMEs tend to vary according to growth stage and industry. To help you work out which type of factoring will suit your business, here is a brief guide to our five options:
Spot factoring is a way for a business to access funds by selling unpaid invoices to a 3rd party, a spot factoring company, on a one off basis in order to receive payment quicker.
Reverse-factoring is a financing option where a 3rd party financial provider finances the supplier on behalf of the buyer. The process involves the supplier, the buyer and the finance provider .The supplier sells the buyer’s unpaid invoice to the finance provider and receives the cash quickly, the buyer also gets longer to pay for its goods.
Account Receivable Factoring
Account receivable factoring provides businesses with an option to finance their venture without taking out a loan. This is a type of debtor finance where SMEs sell its invoices to a third party at a discount, in order to provide an immediate cash injection. There are many reasons why a business may factor an invoice, including increasing cash flow and mitigating credit risk.
Recourse and Non-Recourse Factoring
Resource factoring is a form of finance where a company sells its invoices to a factoring company. The factor pays the company a percentage of their cash value and then chases up payment of the invoices on behalf of the company. Non-Recourse factoring is a form of finance where a company sells its invoices to a factor and receives a percentage of the cash value from them.
Advantages of invoice factoring:
- Benefit from improved cash flow
- Enjoy better working capital, which means more money for growth projects, staff training or stock purchases
- Be able to move away from more restrictive forms of finance, like small business loans or overdrafts
- Benefit from your chosen finance provider’s in-house credit control processes
- Be able to focus on running your business, instead of chasing clients for payment
Disadvantages of invoice factoring:
There are some disadvantages of invoice factoring too - 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:
- You will be putting your trust in your invoice factoring provider to handle credit control and communications with your customers
- Potentially some customers may not understand invoice factoring and will wonder why the company has decided to use it
Is invoice factoring right for your business?
Is your annual turnover £50,000+?
Generally speaking, invoice factoring facilities are best suited to companies that sell to other businesses on credit terms, and turnover more than £50,000 a year.
Do you have high up front costs?
Industries that experience high production costs, seasonal sales slow downs, slow paying clients, experience unexpected growth and other unpredictable costs affecting their day to day operational cash flow use factoring as a non debt solution to their cash flor problems.
Are you experiencing cash flow problems?
Invoice factoring can be used by any industry that sells products or services to another company but in particular industries that suffer cash flow problems due to the nature of their business.
With invoice factoring, you can...
Our factoring service is multi-award winning
We also come highly recommended by our existing customers
"The communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll."Read full review
We've revolutionised factoring companies in the UK with our digital onboarding process
Invoice Factoring FAQs
Want to learn more about how you can boost your businesses cash flow?
Our Cash Flow Resource Hub has been set up to help SME's with cash flow finance advice, tips and resources to help with their cash flow position.
We explore ways you can begin improving your cash flow situation and start getting your business on track to positive cash flow.