Common misunderstandings about invoice factoring

If you’re looking for ways to improve business cash flow, but have ignored invoice factoring because it feels like the choice of last resort, perhaps it’s time to think again.

Factoring is a long-established method of financing business, which has been used for hundreds of years. It’s used by a huge variety of firms, from start-ups to enterprises which have been around for generations. For some, it’s a short-term solution to a cash flow problem; for others, it’s part of their ongoing business model.

Here are some answers to the issues which are known to deter businesses from using factoring.

1. Lack of understanding about invoice factoring. For decades, the banks have preferred to promote loans and overdrafts over factoring, and for that reason many business owners have never needed to know about it.

Invoice factoring is a form of borrowing for firms which sell on credit to other organisations. In a typical factoring arrangement, the moment an invoice is raised, the lender makes an advance of as much as 90% of the invoice value. They also take responsibility for chasing the customer for payment.

When the customer settles their invoice in full, the lender is repaid the advance, along with a fee. It’s a relatively simple process.

2. Invoice factoring is expensive. In reality, factoring costs are easily comparable with overdrafts and bank loans, particularly when the cost savings of outsourced credit control are taken into account.

Invoice factoring lenders are making their fee structures even simpler and more transparent, in response to concerns over the number of different charges. It should be remembered that almost all lending, including overdrafts, includes additional costs beyond the interest payments.

3. Invoice factoring is complicated. Much of the administration is now handled electronically, meaning it happens in the background and with minimal human intervention. This allows funds to be transferred quickly and information to be accessed more easily.

4. Only failing businesses turn to invoice factoring. This misconception is contradicted by the facts. Factoring is proving very popular with start-ups, because it solves the cash flow problems that so many firms have in their early days.

Factoring also grows with the business, unlike an overdraft or a loan, making it a much more flexible form of finance.

Former Dragon, entrepreneur James Caan, has been open about how some of his firms use invoice discounting, which is a form of factoring. It’s part of their business model.

Despite the common misunderstandings surrounding it, invoice factoring remains an important alternative to other types of commercial finance.

This is a guest post by Jasper Martens from Simply Business who offer a range of invoice finance solutions.

 

Comments
TimCaprica's picture

Good post

TimCaprica | | Permalink

I agree there should be a bit of a reevaluation.

I was definitely trained to think it was something that only failing businesses do but there's no reason behind that at all. It's asset backed lending which is surely a more efficient way to borrow than an overdraft.

Market Invoice seem to be gathering a lot of momentum and could hopefully change perceptions.

Touch Financial's picture

Thanks very much reader.

Touch Financial | | Permalink

Thanks very much reader.

I'm delighted with your views on invoice finance as the product needs to be promoted in a bid to capture the small business finance market.

Invoice finance offers countless benefits to SMEs, especially new companies who may have nowhere to go when seeking finance. The facility is asset backed against monies earned and could provide a debt collection service in this economically demanding times.

Definitely has the leading edge over the traditional overdrafts.

Touch Financial's picture

Thanks very much reader.

Touch Financial | | Permalink

Thanks very much reader.

I'm delighted with your views on invoice finance as the product needs to be promoted in a bid to capture the small business finance market.

Invoice finance offers countless benefits to SMEs, especially new companies who may have nowhere to go when seeking finance. The facility is asset backed against monies earned and could provide a debt collection service in this economically demanding times.

Definitely has the leading edge over the traditional overdrafts.

Add comment
Log in or register to post comments
This blog

Touch Financial are the UK’s largest invoice finance broker, working with over 20 of the UK’s leading lenders, from boutique specialists to high street banks, to secure the most suitable cashflow solution for your business.

Through their partnership with their panel of lenders, they have access to a range of business finance products – including asset finance, trade finance, commercial mortgages and accountancy services and also have access to special rates and offers.

Touch Financial has earned its reputation as the UK’s leading broker in asset based lending, having won ‘Asset-Based Finance Broker for the year’ in 2011 and 2012.