Invoice factoring

Invoice factoring can also be referred to as accounts receivable factoring, just factoring, or sometimes accounts receivable financing. This type of financial transaction allows a business to sell its accounts receivable (invoices) to a third party, at a certain discount. Businesses usually turn to this procedure when they need cash immediately.

It works like this: a third party pays you a part of the bill straight away, then collects the money from the customer and then pays you the sum to the whole (minus the fee, of course). Before turning to invoice factoring, we recommend you to consult an accounting service company.  

Movefast, a company selling logistics equipment has an invoice of £20,000 that a customer signs up to pay in 30 days. However, the company’s boss, Jack, needs to pay to the employees this week and he does not have enough money for that. Jack decides to turn to invoice factoring. He sells the invoice to the invoice factory company which charges 3% factoring fee, giving Jack 80%(£16,000) of the invoice straight away. When the customer pays out the whole sum, Jack gets £3,400 more: remaining £4,000 - £600 (3% fee).

Why invoice factoring?
Why not invoice factoring?
Invoice factoring companies

Why invoice factoring?

  1. Cash — you get it quick and in a lump sum.
  2. Cash flow improvement — you can keep a sufficient level of your cashflow to let it grow, being able at the same time, for example, to give longer payment terms for you permanent and loyal customers.
  3. Easy to get — major banks and creditors may be unwilling to give you financing, because of the lack of personal credit or small operating history of your company. Factoring companies’ rules are less strict.
  4. No collateral required — factoring companies do not have the right to get your company’s assets such as real estate or inventory, in case the invoice is not paid at all.
  5. Client base — through factoring, potential clients get credit checked, so you will know who is trustworthy and pay on time.
  6. More time for business — you outsource ledger management, freeing time you would spend to get the money to develop your company.

Why not invoice factoring?

  1. High costs — the factoring fee described above is just the basic. You can also have to pay processing fees for each invoice you file in or credit check fees, or late payment fee.
  2. No control over dealing with customers — you will not know how the relations with the customer go on and will not be able to ensure fair money-collecting and that your company’s culture pursued.
  3. No guarantee of the collection — factoring companies cannot guarantee you to get the money. In this case, they might require you to pay back the invoice yourself or to replace with another one of an equal or greater value.
  4. Loss of trust — your customers might prefer to work with you directly
  5. Your company’s image might suffer if you have a history of many failing cases to collect the debts from the customers.

Invoice factoring companies

Companies serving as a factor in invoice financing are known as invoice financiers. Here is who can represent this role:

  1. A separate independent company specifying on invoice financing
  2. A part/department of a bank or another financial institution
  3. 1 or more individuals, using crowdsourcing platforms

Here is HMRC’s look on the invoice factoring and we have also gathered a list of some well-known invoice factoring companies in the UK.

  1. Ashley Business Finance
  2. Skipton Business Finance
  3. Metro Bank SME Finance
  4. MarketInvoice Ltd
  5. RBS Invoice Finance
  6. Bibby Financial Services
  7. Aldermore Invoice Finance
  8. Close Brothers Finance
  9. Hitachi Capital UK
  10. HSBC Invoice Finance
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