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.