Category Archives: Invoice Factoring Ideas

Invoice Factoring – Is it the right choice?

Managing cash-flow is essential to the long-term health of any business.  The current economic climate is proving difficult for many businesses to navigate, with companies of all sizes facing the catch 22 scenario of needing cash to pay their staff and suppliers so that they can continue to fulfil orders (and generate new ones), but needing to wait for up to 30 or even 60 days for their customers to pay their invoices.  Up until relatively recently, businesses could use short-term loans to bridge this gap, but these are becoming increasingly difficult and complicated to obtain.  For this reason, many businesses are investigating the option of invoice factoring.

Invoice factoring is where a third party takes ownership of the payments process, essentially acting as intermediary between their client and their client’s customers.  This may or may not be transparent to the end customers.  Once the invoices have been verified, the factoring company will usually release 85% of the invoice amount.  The remain 15% will be paid (less fees), upon the customer’s payment of the invoice.

Factoring comes in two main forms: recourse and non-recourse and it’s crucial to understand the difference.  Recourse factoring means that although the factoring company will pay 85% of the amount of the invoice upfront, if the client fails to pay, it is the business which will take responsibility for the management of the debt.  The business will have to pay back the amount of the advance and there may well be fees to pay.  If the business is unable to pay back the advance immediately, interest may be added.  Non-recourse factoring means that the factoring company will take responsibility for resolving the non-payment of invoices.

In essence recourse factoring is a loan secured against an invoice, where the factoring company takes responsibility for collecting the payment of the loan from their client’s customer.  Non-recourse factoring is where a factoring company effectively buys an invoice at a (heavy) discount.

Invoice factoring is currently only available to businesses which operate in the business to business environment.  Most factoring companies prefer their clients to have an annual turnover of at least £50K, although some will consider smaller companies and start-ups.  Factoring companies will also look at the breadth of the customer base and the frequency of bad debts.  In a nutshell, they will be looking for companies which have a broad customer base (as opposed to being reliant on two or three key customers) and where there are minimal to no issues with payment of invoices.  In other words, factoring companies are looking to work with companies, which are interested in using their services to resolve cash-flow issues rather than because they are unable to manage their customers effectively.

Using a factoring company can be a useful way to keep cash flowing in a business, but this convenience comes at a price.  With recourse factoring, there is the added complication of a company spending money only to discover that they need to pay it back to the factoring company and recoup the funds by other means, i.e. by chasing the debt.  Non-recourse factoring provides immediate funds without the possibility of them needing to be returned, but this security carries a higher cost and will generally only be offered  to customers who have next to no problems with non-payment in any case.  Each company needs to do its own assessment of whether the convenience of instant payment is worth the fees involved.