In this article:
- How does factoring work?
- Does factoring mean fast access to cash?
- Can factoring help ensure my invoices are paid?
How does factoring work?
Factoring (also known as debt factoring) is really quite straightforward. Once you’ve come to an agreement with a finance provider, the facility is in place and everything will happen almost automatically:
- When you’ve delivered your goods or services to the customer, you’ll raise an invoice to them as normal, but the finance provider will be involved now.
- They’ll pay you a proportion of the value of the invoice straight away, which is often around 85%.
- When the customer pays the full invoice to the finance provider, who will take charge of credit control and collections, then the remaining value of the invoice is transferred to you.
Every month you’ll pay a fee for the facility, and there’s interest to pay for each invoice.
Does factoring mean fast access to cash?
The idea behind factoring is that it cuts out the gap between raising an invoice and it being paid. This helps cash flow significantly, because it means that cash is ready as soon as you’ve delivered your goods or services to the customer.
In some industries, 60-day invoices are common, and late payers can be very problematic. However, factoring allows a business to concentrate on being profitable, secure in the knowledge that the money will come in as soon as products or services have been sold and fulfilled.
It’s not a direct alternative to things like loans and overdrafts, but rather a more specialised solution that could be great for many businesses with specific problems.
Can factoring help ensure my invoices are paid?
Factoring is really popular for certain businesses because it takes many of the stresses away from invoice management. Where other types of invoice finance are designed only as a lending product against the value of invoices, factoring is a business service in itself.
Start-ups that don’t have the capacity to carry out effective credit control or invoice management can allow their factoring company to handle all of this for them.
Similarly, businesses that have traditionally struggled with getting invoices paid can leverage the expertise of their factoring company to encourage customers to pay when they should.