How does invoice factoring work?

Tuesday 11th January 2022

Invoice factoring is an increasingly popular finance option for businesses that need a boost to their cash flow, and don’t necessarily want to pursue finance from traditional means. However, many business owners and leaders are unsure how it works exactly, so let’s take a look at the basics.

In this article:

  • Is invoice factoring right for my business?
  • How to find the right provider
  • How does the factoring process work?

Is invoice factoring right for my business?

Invoice factoring (sometimes referred to as debt factoring), is all about having a facility in place that means you don’t have to wait for the value of invoices to be paid before the money lands in your account. In many ways, it’s like borrowing against the value of an invoice. When you’re considering this as a product, it’s essential that you work out if this is the right solution for your funding needs.

Factoring is only going to be suitable for businesses that are looking for a funding solution that is designed specifically to deal with cash flow. If you need a large sum of money for a new investment quickly, then a traditional loan might be more appropriate. However, if business is good, but you’re finding that you’re being restricted by the speed your customers pay invoices, then factoring might be a good solution. It can help meet monthly demands, and give you the freedom to invest in new areas.

As the factoring company takes care of the credit control process while the facility is in place, factoring is also useful for businesses that need help in this area.

Find out how much invoice factoring would cost your business using our calculator

Invoice finance calculator

How to find the right provider

Once you’ve decided that factoring is right for you, the next step is to find a finance provider. Factoring companies aren’t always as common as typical lenders such as business loan providers, but there are still plenty to choose from. You’ll want to find a provider that fits with your business, in terms of the contract it can offer, as well as the way in which it collects invoices on your behalf. After all, your customers are going to deal with this business.

How does the factoring process work?

With the agreement in place, the process is fairly simple, and follows the below steps:

  1. You deliver products or services as normal, and raise an invoice to the customer with your chosen factoring provider
  2. The invoice will be payable to the factoring company
  3. Within around a day of the invoice being raised, your finance company will deposit the majority of the value of the invoice into your account - usually around 80-90%
  4. When the customer pays the invoice, the remainder of the value is deposited, less a fee for the interest

Generally, factoring plans will involve a monthly recurring cost as well as the interest fees. This is usually based on turnover - and one of the benefits of invoice finance is that contracts will scale with turnover.

Are late payments causing cash flow issues for your business? Get in touch to find out how invoice factoring can help

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