There are lots of different financial products for businesses to choose from in the current market, and one non-traditional option that’s used by many thousands of UK businesses is factoring, which is a type of invoice finance. It’s often recommended for businesses with certain needs, and isn’t your typical loan or overdraft.
With this in mind, there are three questions you should ask yourself to decide whether or not invoice factoring is worth it for you. However, it’s always worth remembering that you should consult a financial adviser before you make any decisions about whether a financial product is right for your business’ needs.
In this article:
- Do you struggle with cash flow?
- Are unpaid invoices a problem for you?
- Do you need collections help?
1. Do you struggle with cash flow?
Unlike a loan, overdraft, or finance arrangement, it’s not designed for businesses that need a pot of money to pay for something specific and one-off. It’s an ongoing facility that can help companies ensure that cash comes into the business as it should in a regular way.
If you find that you often don’t have plenty of cash on-hand for paying things like payroll, or there’s never enough spare cash for investment, then invoice factoring might be for you.
2. Are unpaid invoices a problem for you?
There are lots of reasons that a business might experience cash flow challenges, but invoice finance is designed specifically - as the name suggests - to remedy the problem of late invoice payments.
If you’re in an industry where invoices are often a struggle, perhaps because you’re at the bottom of a payment chain, then factoring may well be for you.
However, if your cash flow issues are more to do with a lack of profitability, then this might not be a suitable financial product, as you still need to be raising invoices profitably for the facility to be worth it.
3. Do you need collections help?
The final point to think about is that invoice finance covers a broad range of products, of which factoring is just one.
Factoring in particular also includes invoice management services, which means that the finance provider will collect invoices on your behalf. This is often hugely useful for smaller businesses that don’t have the resources to effectively chase the money that they’re owed, and it also gives some help to those companies that have found their existing processes aren’t effective enough. We often find that late-paying customers are more likely to pay quickly when they’re dealing with a specialist finance provider such as ourselves.
Alternatively, if you don’t need any help with credit control, then invoice discounting, which is a confidential facility, might be better suited to your needs.