Invoice factoring is a flexible form of cash flow funding, providing you with immediate access to cash you've already invoiced. Typically, a lender will advance you up to 95% of the cash tied up in your unpaid invoices as soon as they are raised.
However, in the majority of cases, a lender will also manage your sales ledger, credit control and payment collection. While they would suggest this gives you more time to generate sales and manage your business, we would advise anyone considering invoice factoring to be wary - do you really want outsiders meddling with your finances? While it can be seen as a good short-term solution, businesses do run the risk of becoming too dependent on their chosen factoring company, to detrimental effect. Indeed, in most cases you will be obliged to commit to these companies for a considerable amount of time, rather than for the odd invoice that needs paying to ease cash-flow.
Therefore, we would suggest seriously considering other options including secured loans. Just like invoice factoring, which is measured against work already completed, secured loans depend on assets and as such require no credit or financial checks. To find out more, see ‘What Are the Alternatives to Invoice Factoring?' droplink below.
Nevertheless, if you do want to continue with invoice factoring, these are the three steps that you will commonly come across in order to receive payments:
Step 1 – You provide goods or services to your customers and send an invoice to both the customer and lender.
Step 2 – A lender will then make a pre-agreed percentage of the invoice value available. A lender will typically offer an 85% advance, although 95% is available from some lenders.
Step 3 – Once the lender has collected payment from your customer they will return to you any money owed to you, minus cash already advanced and any fees.
Having stated these steps, we should point out that you do need to be able to positively answer the following questions before you will be considered by a factoring company:
- Do you raise invoices to other businesses?
- Is your projected turnover for the forthcoming year more than £50,000?
- Do you offer credit terms between 30-120 days?
- Is your business based in the UK?
Unlike invoice factoring, other loan types such as secured loans have no barriers to entry. In fact, all you need do is confirm you own the asset you need to loan against. To find out more, see our secured loans page.
Invoice discounting is very similar to invoice factoring (which is discussed in the above Q&A). The key differences are that with invoice factoring, an external factoring company does the legwork for you, chasing down customers and making sure invoices are paid. With discounting, you chase and collect customer details yourself and then send the information to a factoring company which then promptly lends you the agreed sums.
Put simply, invoice discounting is less integrated than invoice factoring.
Due to the lesser role, invoice discounting is seen as a greater risk to the lender than invoice factoring so the sums you can borrow against your sales ledger with invoice discounting are lower than with invoice factoring.
Invoice factoring is worth considering. It is a tried-and-tested way of bridging the gap when you are awaiting invoices to be paid. However, there are many other options in today's market that should be considered and may suit you better depending on your circumstances:
Get access to cash by securing a loan against valuables. Borro loan against almost anything from paintings paintings to gold and everything in-between. If you have any assets that you could do without for a 6-month period, this may suit you better than invoice factoring which will result in reliance on an external company. Unlock capital today at favourable rates and without the need for any credit checks - just call us on 0808 163 3826 .
Unlike secured loans, unsecured loans cannot be measured against physical assets. As such they are heavily dependent on a solid credit score and financial history to obtain agreeable rates. For more information on the pros and cons of unsecured loans, see our unsecured loans comparison page.
Did you know Borro offers loans against cars? Many people overlook these assets as they are one of the World's biggest depreciators. However, you would be wrong in thinking all cars depreciate in value - just see our Value of Cars page to find out more! Alternatively, you may take out a logbook loan. These allow you to retain the use of your car in exchange for vehicle documentation such as your V5 logbook certificate. However, rates are often very high. For more information on the pros and cons of logbook loans, see our logbook loans comparison page.
If, having read this, you see secured loans as a strong alternative to invoice factoring, you should browse our Value of Assets which gives an in-depth guide to assessing the value of your valuables.