Accounts Receivable Factoring
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If you’re not quite ready to get started, read our guide to gain a deeper understanding of accounts receivable factoring and how it could benefit your business.
What is accounts receivable factoring?
Accounts receivable factoring is a form of invoice finance that allows you to release funds from the invoices that you have raised, but have yet to be settled.
It’s a lending product that is used to improve business cash flow and ensure that your company is liquid and able to trade effectively.
How does accounts receivable factoring work?
It works by allowing you to sell your invoices to an invoice finance provider to enable you to receive a portion of the funds due immediately.
Your lender will then handle the credit control process on your behalf to ensure prompt payment once it is due.
Once your customer has settled the invoice, you will receive the remaining funds, minus the factoring fee.
Are there different types of factoring that can be used to raise finance from my accounts receivables?
Yes, there are several different types of invoice finance product that can be used to improve your business’s finances. The main ones are invoice factoring and invoice discounting.
While these two products work in a similar way, there are subtle differences between them, which we cover in full in our guide to invoice factoring vs invoice discounting.
These two main products can be further broken down into debt factoring, selective invoice finance and asset-based lending.
The difference between some products can be subtle and choosing the right fit for your business is often difficult. If you’re unsure, it is good practice to talk to an experienced invoice finance specialist. Our team are on hand and can be reached on 01922 620008.
What are the advantages and disadvantages of this type of finance?
The key advantages and disadvantages are as follows:
Advantages
- AR factoring allows you to improve your company cash flow on an ongoing basis, leaving you to focus on running your business.
- It is a simple form of commercial finance that allows you to release funds based on your sales ledger and the strength of your customers.
- For financed invoices, the factor will handle credit control on your behalf, making your collections process simple. Once the invoice is settled, the funds are released to your business, minus the fee due to the factor.
- Your company credit score is less important than would be the case when taking out a business loan. This means that you could still qualify even if you have poor credit such as CCJs, defaults or missed payments.
Disadvantages
- Although this type of finance can be a major benefit to your company cash flow, there is still a cost for using it. This will ultimately reduce your margins unless you use the facility to grow your business.
Why should I consider this type of commercial finance?
Most businesses that take accounts receivable factoring do so because of the significant cash flow benefits that it offers.
If delayed payment terms are impacting your ability to manage your company finances, factoring could offer a solution.
In addition, support with credit control is a key factor for a lot of small businesses that would otherwise struggle to manage their sales ledger due to waiting 60 days for funds.
What is the cost of accounts receivable finance?
Whenever a factoring company finances your sales ledger, they will charge a fee for their service. The cost will depend on several factors including the provider chosen, your sector, the strength of your customers and the amount you wish to borrow.
The true cost is made up of several fees, they are:
- Discount charge – The discount charge can vary in line with the above factors, but is generally between 0.5-5% of the invoice value.
- Facility fee – The facility fee is the cost of maintaining the facility on an annual basis.
- Credit management fee – This fee is charged for the credit checking and admin costs associated with a customer.
- Credit protection fee – This will only apply if you have chosen non-recourse factoring which sees the factoring provider take the risk for non-payment of the invoice.
What are the alternatives that I can use to raise finance for my business?
When looking to raise finance for your business, the alternatives to invoice finance products are:
- Asset finance – Asset finance allows you to borrow against either existing business assets or new assets or equipment that you would like to acquire.
- Business loans – Business loans are made up of secured business loans and unsecured business loans. A business loan is a simple way to borrow that sees you receive a lump sum, which is then repaid through equal monthly repayments over a fixed term.
- Merchant cash advance – For businesses that take a large amount in card payments each month, a merchant cash advance may allow you to borrow against your future card takings.
Keep reading – The advantages and disadvantages of debt factoring or CHOCC.
