Invoice Factoring UK
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Author: Gary Hemming CeMAP CeFA CeFA CSP
20+ years experience in invoice finance
Invoice factoring allows you to release cash from your sales ledger to improve your cashflow. These facilities operate on an ongoing basis as a form of revolving credit that release more funds each time you issue a new invoice.
The lender then supports your business by handling the credit control process to ensure you’re paid on time and in full.
Key Features
Max Funding
Up to 95%
Invoices Paid
From 24 hours
Products Available
Invoice Factoring, Invoice Discounting & Selective
Application Timescale
From 24 hours
Online Comparison
Apply in 4 minutes
Criteria
Funding for UK businesses only
Bad credit considered
Start ups accepted
No minimum or maximum turnover
Why use ABC Finance?
Our invoice financing comparison platform makes the process of applying for funding simple. We’re the only company that offers a genuine comparison tool, without the need for dozens of negotiation calls from lenders – saving you valuable time and hassle.
Like any modern-day comparison service, you simply input your details into the platform. You can then view and compare offers from trusted providers all in one place. Our advisors are always on hand to discuss your offers and answer any questions.
Once you’ve had an offer that you’re happy with – whether that be down to concentration limit, advance rate, costs or add-ons such as bad debt protection, you can choose to engage with that lender.
No lender will contact you unless you specifically choose to interact with them, meaning you stay in control throughout the process.
How To Apply With ABC Finance
Fill out your details using our simple online invoice finance comparison tool.
Lenders bid on your business by offering terms based on your business circumstances.
Once you’ve received an offer that you like, begin discussions with that lender in one click.
Your application can be moved forward and once approved, formally signed and completed.
The application process is complete and your funds are sent to your bank account.
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What is invoice factoring?
Invoice factoring, also known as debt factoring, is a type of invoice financing that enables you to release the funds tied up in your sales ledger. It is a form of revolving credit that continuously funds new invoices as they’re raised, to improve your business cash flow by speeding up your cash flow cycle.
Your factoring company, known as the factor, pays most of the value of the invoice raised, usually between 80-90%, and then handles all credit control to ensure the invoice is settled when due.
Upon settlement of the outstanding invoice, the remaining balance is paid to you, minus any fees and charges due.
How does invoice factoring work?
It works as follows:
- You send your invoice to clients and provide a copy to your lender. The invoice usually dictates payment to an account other than your main bank, usually a lender-controlled account that is used specifically for factoring.
- Once the invoice is paid, your lender will let you know and the remainder of the funds due to you are released.
- The lender will then release the funds to you, usually on the same day or within 24 hours.
- Unlike invoice discounting, credit control is handled on your behalf, meaning you can focus on delivering the next order, without worrying about payment.
Invoice factoring costs
The costs of an invoice factoring facility are calculated individually based on the details of the company that is applying. The key elements that decide pricing are as follows:
- The turnover of your business
- The financial strength of your customers
- The average payment terms
The main costs can be broken down into two fees:
Service fee
The service fee covers the costs of managing your facility. This fee is usually charged based on your turnover.
Factoring fee
The factoring fee is the interest charged on the funds that you borrow. It’s charged based on the amount drawn down at any time and as such, you will save money when invoices are settled early, and it will cost more when invoices are settled late.
Will I qualify for invoice factoring?
If you issue invoices to your customers and operate on 28 day payment terms or longer, you have a great chance of qualifying. Here’s a quick guide to which applicants can qualify:
You operate a B2B business
Invoice factoring is only available for businesses who sell to other businesses, known as business to business, or B2B companies.
Your invoice factoring provider will assess the strength of your clients business to ensure they have sufficient financial strength to reliably pay due invoices going forward.
You have a robust sign off process prior to the invoice being raised
Your sign off process for completed work must be watertight to ensure that all invoices that are factored are ultimately settled by your customer. A clear purchase order or sign off for work completed will mean your invoices can be financed without issue.
You’re UK based
As a UK based company, our service is only available to UK businesses or those who live or trade in the UK.
What our expert says…
“Invoice factoring is an important tool for any business owner who operates on delayed payment terms and require support with credit control. For these businesses, cash flow management is a key issue and the more successful you are, the tighter cash flow becomes.
As an industry, it hasn’t always been easy to access the invoice factoring market without being bombarded with phone calls, and this is something we wanted to change.”
Author: Gary Hemming CeMAP CeFA CeFA CSP
20+ years experience in invoice finance
When should a company use invoice factoring?
A company should use invoice factoring when they accept payment on delayed terms, regularly have large amounts of invoices outstanding and have a need for increased cash flow.
If a business could become more profitable with improved cash flow, then invoice factoring could be a valuable tool for you.
For example, if your business could benefit from a healthier business bank balance but you have outstanding funds tied up, invoice factoring could allow you to release those funds, or at least a significant portion of them. This can transform a business.
These funds can be used to:
- Grow the business
- Invest in marketing
- Pay ongoing business expenses
- Plan your business without being hampered by cash flow
What are the Advantages?
The key advantages of invoice factoring are:
Improved business cash flow
When factoring your invoices, you receive most of the money due upfront, transforming your cash flow in the process. These funds can be used to drive the business forward in a controlled manner, rather than operating in reaction to customers paying you.
Support with credit control and collection
Your funder will handle all credit control for you, making sure they’re settled as they fall due. Once your customer pays, you receive the remaining funds, minus any charges due.
It scales with your business
As your business grows, your funder will release more funds. This is because funds are released as a percentage of the amount invoiced. For example, if your advance rate is 90% and you invoice £100,000, you receive £90,000. With £1,000,000 due, this becomes £900,000.
It makes you more efficient
Your invoice factoring provider will save you time by chasing invoices, leaving you free to get on with running your business and increasing your profits.
What are the Disadvantages?
The key disadvantages to consider are:
Your customers will know that you’re using it
As your invoice factoring provider will be handling credit control, your customers will know that you’re using it. While this isn’t a problem and is perfectly normal, some business owners would prefer to avoid this. In this situation, consider a confidential invoice discounting facility.
There is a cost involved
There is a cost of taking on the facility – usually around 1-2% of your turnover. While this cost does impact your profit margin, it is usually cheaper than the cost of paying a team of credit controllers and the improved cash flow may be beneficial.
It can impact your customer relationships
As your invoice factoring provider will be handling credit control and chasing payment, they will focus on securing payment, and may not handle key customers as delicately as you would. This can be an advantage or disadvantage – depending on how you look at it.
Are there different types?
Yes, there are different types of invoice factoring, they are:
Account receivable factoring
Accounts receivable factoring allows businesses to finance their operations on an ongoing revolving credit basis.
This type involves each invoice being financed on an ongoing basis, with most or all customers invoices being included in the facility.
This is an excellent option for business owners who want ongoing debtor finance to improve their cash flow, mitigate credit risk and benefit from ongoing credit control support.
Recourse & non-recourse factoring
These 2 products slightly differ. The term recourse factoring means that should a customer fail to pay an invoice that has been financed, then the company must repay their lender, buying back the invoice.
On the other hand, non-recourse factoring sees the lender take the financial risk of non-payment. Should a customer fail to pay, the invoice factoring company will absorb the cost, with no liability falling on the company who took out the facility.
Reverse factoring
Reverse factoring is a financing tool where a finance provider pays a supplier on behalf of the buyer.
Spot factoring
Spot factoring, also known as selective invoice finance allows you to select either single invoices, or select customers to finance. If you’re only looking for finance or help with credit control in some cases, this can be an excellent and flexible approach to achieving this.
What are the alternatives?
In the UK, invoice factoring alternatives are:
- Business loans – A business loan is a more traditional and less flexible way for businesses to borrow money, but allow funds to be raised quickly. Unsecured business loans can be set up in as little as 24 hours. This option sees a lump sum of cash released to the business that is repaid over a fixed term through regular monthly payments.
- Business overdrafts – An overdraft is a flexible way to borrow, that allows you to take your business bank account balance into the negative in exchange for interest payments. Overdrafts generally allow you to borrow less than would be possible using invoice factoring.
- Revolving credit facilities – Revolving credit facilities come in many forms, but a popular one is a standalone business revolving credit facility. These products allow you to borrow and repay funds as needed in a flexible way.
- Merchant cash advance – For businesses who also take payment through a card terminal machine, a merchant cash advance could allow you to borrow against your future card receipts.
Frequently Asked Questions
Will my customers know I’m factoring my invoices?
When you take out a factoring facility, your customers will be aware of it as your funder will chase payment for invoices and the invoice is paid to the lender.
Most customers will completely understand and clearly you should do what’s best for the financial health of your business. That said, if you want to avoid alerting your customers, a confidential invoice discounting facility would make this possible.
What is the difference between recourse and non-recourse invoice factoring?
The difference between recourse and non-recourse factoring comes down to what happens if a customer fails to pay an invoice. As your invoice finance provider releases funds upfront, within 24-48 hours, an unpaid invoice causes problems as by the time it falls past due, you will have already borrowed money against it.
Recourse factoring agreements leave the responsibility at your door, and you will be responsible for covering the lender’s costs and repaying them. Non-recourse agreements, mean that there is no comeback for an unpaid invoice, with the lender taking the financial hit. For this reason, it is often referred to as bad debt protection.
Bad debt protection does come at a cost, however, as all insurance does. In this case, through the form of a slightly higher cost.
Is factoring right for my business?
If your business operates B2B (business to business) and takes payment through invoices on delayed payment terms of 30-90 days then factoring could be a good fit. The key comes down to your need to increase working capital and improve cashflow.
If improving these areas of your business would allow you to grow, make better decisions, or become more profitable, then invoice factoring should be a serious consideration.
Will I qualify for this type of financing if I have bad credit?
Yes, you can still qualify even if you have bad credit, as long as your customers are strong.
This is because it is your customers who settle the invoices raised, and therefore ultimately settle the finance raised. As credit control is handled by the lender, this makes your credit history less important than with other types of business finance, such as unsecured business loans.
Your credit history will still be taken into account during the application process, but if the overall application is strong, there is a good chance that you’ll still be approved.
Why do companies take out cash flow finance?
The main reason is to improve the cash flow of a business. This is due to the fact that a large proportion of each invoice is released when it is raised.
In addition to the improved cash flow position, when factoring invoices, credit control is passed on to your lender, which can save you a lot of time.
Which industries is factoring commonly used by?
Some industries often see companies run using factoring. This is due to delayed payment terms being commonplace and cash flow being key to success:
- Printing
- Security firms
- Manufacturing
- Engineering
- Recruitment
- Wholesale
- Transport
- Logistics
- Construction
- Freight
Of course, any company supplying payment terms of 30 days or more can benefit, regardless of industry.
How does it differ from invoice discounting?
Invoice discounting allows you to retain management of the collections process, whereas invoice factoring hands this over to the finance provider, known as the factor.
If your business has strong control over your sales ledger and only requires the financing side of things, then discounting may be a better option. If more support is required, then invoice factoring is likely a better fit for your business.
