Invoice factoring, also known as debt factoring, is a type of invoice finance, whereby a company can essentially borrow money against the value of their unpaid invoices. When an invoice is raised, most of the value is given to the business as cash straight away by the factoring company, and then the full amount is collected from the customer. The idea is that it cuts down on the delay between an invoice being raised, and the customer paying it.
3 main reasons that businesses use factoring:
- To cover monthly expenses
- Help with their Credit control
1. To cover monthly expenses
For many businesses, monthly expenses can be hard to meet. Rent, staffing, fuel, stock and more can all add up rapidly.
This is particularly important in certain industries, where there are significant staffing costs which require a regular supply of cash. The recruitment industry for example relies on the ability to quickly take on and pay new staff to meet demand and contracts, but sometimes it can take months for a deal to be closed, and the money to eventually arrive. Factoring can help reduce the time it takes to get the money.
Of course, the other reason that a business might need to use factoring is that they want to expand or take advantage of market movements. This is often not possible without a ready supply of cash. Factoring ensures that business can be ramped up quickly, and the revenue generated can be instantly realised as cash, giving the flexibility to invest in whatever the business needs.
If we think about the money that needs to be invested in the launch of a new product or service, it can sometimes be daunting if a business cannot be confident that they’ll recoup the money quickly, but by using invoice finance, some of this concern can be mitigated. Of course, it’s always important to consider the cost involved too.
3. Help with their credit control
The final reason that a business might choose to use a factoring service is that they are struggling with their credit control process. It can sometimes be difficult for businesses - particularly smaller ones - to properly keep track of what they’re owed, and crucially, difficult for them to chase customers that aren’t paying when they should.
Unlike some types of invoice finance, factoring puts credit control in the hands of the factoring company. This means that the finance provider will act as a collector for any customers that are late, taking away a considerable amount of stress for many business owners - particularly smaller ones.