How does invoice factoring help your business manage its cashflow?

Invoice factoring typically allows you to access between 80- 95% of the value of your unpaid invoices within 24 hours to ease your company’s cashflow, for a fee.

To maintain a healthy cashflow, every business requires money to come in regularly to pay for operational costs, goods and services, and staff. But when your customers aren’t paying on time, or you have lengthy payment terms, bills can’t be paid, and growth slows down.

Fortunately, your unpaid invoices are an asset you can use to help manage cashflow to pay those bills or realise growth opportunities.

UK businesses face challenging cashflow

Although the figures are updated regularly, around half¹ of businesses within the UK have experienced late payments, so you’re not on your own if you’re facing cashflow difficulties.

This has led to more companies seeking external sources of finance to manage cashflow, with invoice factoring becoming one of many methods to manage the efficiency of money coming in and out of a business.

If you’re focused on providing excellent service, then not being paid on time can feel disheartening and, worse, threaten a business's viability. It can also prevent you from capitalising on opportunities for growth or expansion.

That’s why invoice factoring not only helps with cashflow but can free up your time currently spent on chasing payments to enable you to drive your business forward with confidence.

How does invoice factoring work?

Factoring is a quick way to release cash tied up in your customers’ outstanding invoices allowing you to access your funds earlier.

Here's how it works:

1. Complete your work or sell your goods as usual.
2. Invoice your customers and send a copy to your funder.
3. Within 24 hours, the funder typically pays you up to 95% of the value of your invoices.
4. The funder collects payments of the invoices on your behalf, acting as your outsourced credit control department.
5. The customer then pays your funder what is owed.
6. You'll then receive the remaining amount minus any agreed fees from your funder.

What are the benefits of factoring?

Factoring is a quick and easy way to improve your cashflow without taking on the additional debt of a business loan and removing the stress of collecting payments. And as your turnover increases, the amount of funding available can also increase. You can also ask for a confidential service so your customers don’t know you're using a factoring facility.

It provides peace of mind that you have the money to pay staff, for goods and services and overheads. But it also frees up time that would otherwise be spent chasing payments from your customers – you can focus on productivity and customer experience.

What types of companies use factoring for cash flow?

All types of companies use invoice factoring, but there are some that, due to their business model and industry, make use of it more than others. Examples of these are below.

• Manufacturing: manufacturers have a tight profit margin while having to pay suppliers for raw materials to deliver on a customer’s order, pay wages, and expensive factory overheads. Factoring for manufacturing is used to bridge this gap.
• Transportation: it’s usual for haulage companies to utilise invoice factoring to cover high fuel, labour, and maintenance costs for trucks.
• Recruitment: paying contractors weekly, bi-weekly, and monthly means ensuring you can pay wages before a client pays the bill. Factoring allows recruitment businesses to focus on placements rather than funding.
• Healthcare: while facing staffing shortages, clinics, hospitals, and nursing homes also have to deal with burdensome insurance contracts and delayed reimbursement, which factoring eases considerably.
• Professional services: with marketing, IT, and consultancy companies often waiting up to 90 days for payment, factoring offers peace of mind to pay overheads.
• Construction: construction firms experience staged payments and a time lag from completion of work to payment, and with paying wages and high costs for building materials, invoice factoring helps to balance the books. A more tailored finance solution is often used in this sector.

When is the right time to use factoring?

Invoice factoring can help businesses improve their cashflow at any time.

Whether you are struggling to pay significant bills or considering growing your business and need to raise money, it’s always a good time to explore factoring as an option.

1. Cashflow fluctuations: if you are having difficulties paying your suppliers, staff, or overheads.
2. Delayed payment: if your customers take a long time to pay your invoices and it’s putting pressure on your business.
3. Opportunity to grow: when you have spotted an opportunity to grow but can’t take advantage of it due to lack of cashflow.

Talk to us today if factoring could help improve your business's cashflow. You can also see how we recently helped a customer like you here.

Sources:

1: FSB. 2023. Late payments stifle small businesses. [Online]. Available from: https://www.fsb.org.uk/resources-page/time-is-money-late-payments-stifle-small-businesses-report-shows.html. [Accessed 18th July 2023].