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Invoice factoring allows businesses to sell their unpaid invoices to a third-party finance company, known as a factoring company, in exchange for immediate cash. The factoring company then takes responsibility for collecting the outstanding payments from the business's customers, and once collected, will pay the remaining balance owed to the business after deducting their fees.
Businesses should consider using invoice factoring because it provides them with immediate access to cash flow without having to wait for their customers to pay their invoices. This can be particularly beneficial for businesses that have long payment terms, which can often put a strain on their cash flow and limit their ability to invest in growth opportunities that arise. By selling their invoices to a factoring company, businesses can receive a percentage of the invoice value upfront, which can be used to cover expenses and invest in growth.
Another benefit of invoice factoring is that it allows businesses to outsource their credit control and collections processes, which can be time-consuming and costly. The factoring company takes on the responsibility of chasing up payments from customers, which can save businesses time and money, and free up resources that can be better used elsewhere.
Invoice factoring can be a valuable financing option for businesses in the UK that need to manage their cash flow and improve their credit control processes.
Small businesses with limited cash flow
Small businesses often struggle with limited cash flow, which can make it difficult to pay bills, buy inventory, and invest in growth. By using invoice factoring, small businesses can get immediate cash for their unpaid invoices, which can help them manage their cash flow and stay afloat.
Start Ups
Start ups often have difficulty securing traditional financing because they lack a financial track record. Invoice factoring can be a good option for start-ups because it's based on the creditworthiness of their customers rather than their own financial history.
Businesses with long payment terms
Some industries, such as construction or manufacturing, may have long payment terms that can put a strain on cash flow. Invoice factoring can help these businesses get paid quickly for their work, without having to wait for their customers to pay their invoices.
Businesses with seasonal or fluctuating sales
Businesses that experience seasonal or fluctuating sales may have periods of the year when they need more cash than others. Invoice factoring can help these businesses get the cash they need during slow periods, without having to rely on expensive loans or credit lines.
Businesses that want to outsource credit control
Some businesses may not have the resources or expertise to effectively manage their credit control and collections processes. By using invoice factoring, these businesses can outsource these tasks to a third-party factoring company, which can help them save time and money while improving their cash flow.
Invoice factoring allows businesses to turn their unpaid invoices into immediate cash. It's a financing option that's available to businesses of all sizes and in all industries, and it can help businesses manage their cash flow, fund growth opportunities, and improve their credit control processes.
Here are a few practical ways businesses can use invoice factoring, along with representative finance examples:
Covering cash flow gaps
One of the most common ways businesses use invoice factoring is to cover cash flow gaps. Let's say a small business has an outstanding invoice for £10,000 that is due in 60 days. The business needs cash to cover its operating expenses, but it can't wait 60 days for the invoice to be paid. The business decides to sell the invoice to a factoring company for 80% of its value. The factoring company charges a fee of 3% for every 30 days that the invoice is outstanding. Here's how the calculation works:
Invoice value: £10,000
Factoring advance rate: 80%
Advance amount: £8,000
Factoring fee: 3% per 30 days
Invoice due in: 60 days
Factoring period: 30 days
Factoring fee: 6% (3% x 2)
Factoring company pays: £7,520 (£8,000 - £480)
In this example, the business is able to get £7,520 in immediate cash, which it can use to cover its operating expenses.
Funding growth opportunities
Another way businesses can use invoice factoring is to fund growth opportunities. Let's say a start-up has a large order for £50,000 that it needs to fulfill. The start-up doesn't have the cash to buy the materials and pay its workers, so it decides to sell the invoice to a factoring company for 85% of its value. The factoring company charges a fee of 1% for every 10 days that the invoice is outstanding. Here's how the calculation works:
Invoice value: £50,000
Factoring advance rate: 85%
Advance amount: £42,500
Factoring fee: 1% per 10 days
Invoice due in: 30 days
Factoring period: 10 days
Factoring fee: 3% (1% x 3)
Factoring company pays: £41,275 (£42,500 - £1,225)
In this example, the start-up gets £41,275 in immediate cash, which it can use to buy the materials and pay its workers to fulfill the order.
Outsourcing credit control
Finally, businesses can use invoice factoring to outsource their credit control and collections processes. Let's say a business has a customer that is consistently late with payments, which is putting a strain on its cash flow. The business decides to sell the customer's invoices to a factoring company, which will take responsibility for collecting the payments. The factoring company charges a fee of 2% for every 30 days that the invoice is outstanding. Here's how this calculation works:
Invoice value: £5,000
Factoring advance rate: 80%
Advance amount: £4,000
Factoring fee: 2% per 30 days
Invoice due in: 60 days
Factoring period: 30 days
Factoring fee: 4% (2% x 2)
Factoring company pays: £3,840 (£4,000 - £160)
The business gets £3,840 in immediate cash for the customer's invoice, and the factoring company takes responsibility for collecting the payment. The factoring company will charge a fee of 2% for every 30 days that the invoice is outstanding, which will be deducted from the final payment.
Invoice factoring is a service that all businesses can utilise regardless of their size or industry, and can provide a number of benefits that traditional financing options may not offer.
As an asset finance broker, Bluestone can help businesses in the UK with a range of cash flow finance services. We work with a network of lenders and factoring companies to provide tailored cashflow solutions that meet the specific needs of our clients.
At Bluestone, we pride ourselves on providing a personalised service to each of our clients. We take the time to understand their unique needs and challenges, and we work with them to find the best financing solutions to meet their needs. Whether a business needs help with invoice factoring, asset-based lending, or another cash flow finance service, we are committed to providing the support and expertise they need to succeed. To find out more, get in touch with our team of experts today!
Last Updated: February 2023. Version: BS.202304.01BL36
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