If you run your own business, factoring could be a great way of keeping your cashflow going or investing in things like new technology or more staff. But knowing when to set up a factoring facility can be tricky, so here we take a look at the situations in which it might be right for you.
What is a factoring facility?
Factoring is a flexible type of finance offered to businesses of all types and sizes. When you issue an invoice, instead of waiting for the client to pay up, you can outsource the invoice to a factoring firm. The firm will advance you a large proportion of the money – usually about 90% – and take up the invoice on your behalf with your client. Factoring can be an essential way for a business to maintain cashflow in between large projects or whilst waiting for a big bill to be settled.
Is factoring right for my business?
Many businesses like to have a factoring facility in place and they are commonly used in all sorts of industries, from manufacturing and IT to haulage and construction. The great thing about them is that no other assets are needed in order to secure the factoring finance and the amount borrowed is based on sales, making them an ideal way to fund growth.
Factoring facilities for new start-up businesses
Factoring is used by start-up businesses for a number of reasons. Sometimes the start-up has been unable to obtain traditional forms of funding, such as a bank loan, but already has clients and work lined up. Or it might be that a start-up grows more quickly than expected and needs extra funds to make that jump to the next level. Simply Factoring Brokers can put in place the right factoring facility for you to enable these things to happen.
Factoring for small businesses
Small businesses and sole traders often rely on one or two major clients. Close partnerships like this can work really well – but what happens if a main customer suddenly misses a payment? It’s wise for small businesses to have a factoring facility in place to give them breathing space if this happens, without jeopardising their working relationship with a regular.
Factoring facilities for established and larger firms
Factoring is ideal for longstanding and large firms with a high turnover. At Simply, we source factoring facilities for businesses with a turnover of anywhere between £200,000 and £10m, proving your business can never be too old or too big to start factoring!
What if my client goes bust or cannot pay?
Some factoring agreements state very specifically that if an invoice is not paid within, for example, 90 days, the factor will reclaim the money it has advanced. But many factoring firms offer a ‘without recourse’ service, where the payment is insured. This costs a little extra and might mean the business receives 80% of the invoice instead of 90% – but this is surely better than getting nothing if your client goes under!