Invoice factoring is a creative way in which many businesses are battling cash flow problems. This unique product essentially allows businesses to release capital equity tied up in invoices. Using invoices as collateral to secure finance, invoice factoring permits businesses to bridge the gap between delivering goods/services and being paid for them.
With invoice factoring being a relatively under-utilised phenomenon, many businesses are understandably confused as to what their options are and how the process of invoice factoring works. This is why below, we have compiled a list of FAQs, providing answers to commonly asked questions on the subject of invoice factoring.
How does invoice factoring work?
- Deliver your goods or service
- Send your invoice to the finance company and your customer
- Receive up to 90% of the invoice value from your chosen finance company
- Your customer pays the invoice 30-60-90 days later (as normal)
- The finance company pay you back the remaining 10-20% of the invoice minus their fees (Typically less than 2%)
What’s the difference between invoice factoring and invoice discounting?
(How does invoice factoring and invoice discounting differ? Or How is Invoice factoring different from invoice discounting?)
Invoice factoring and invoice discounting have the same benefits; giving businesses a cash injection when they need it the most. However, invoice discounting is a confidential process whereby the debtor is unaware that you are using invoice financing. When using an invoice factoring facility, the third-party company can chase your payments for you. But, with invoice discounting, you remain responsible for chasing payments.
What types of invoice factoring companies are there?
Invoice factoring companies come in all shapes and sizes. From high street banks and building societies to specialist finance companies, the list goes on. This is why recruiting the help of a finance broker is an advisable move, ensuring you are getting a whole-of-market view of your options.
What are invoice factoring fees?
Like any form of finance, there are fees you need to consider when comparing invoice factoring quotes. The factoring fee is where the factoring company will make their money. The better a business’ credit history and the stronger the relationship with their factoring company, the more favourable this fee will be.
Businesses may also want to consider taking out Bad Debt Protection when utilising invoice factoring. BDP can ensure that if your debtors go bust or do not pay their invoice for any other reason, the outstanding balance can be covered by insurance. This typically costs around 1% of turnover.
Should I use an invoice factoring broker?
If you are passionate about getting the best price from a reputable factoring company then going through a broker is the best way to achieve this. Not only do they boast specialist knowledge of invoice finance, but they will be able to match you with a funder to suit your individual requirements.
Here at Simply Factoring Brokers, we have been helping businesses access invoice factoring services for many years, being a specialist area in which we as a business have become renowned for. To discuss your invoice finance options and for a no-obligation quote, contact us today.