Extending credit is an excellent way to encourage sales and is considered very much the norm when making business-to-business (B2B) and business-to-government (B2G) sales. However, while waiting for 30, 60 or even 90 days for a payment to be made, you miss out on the cash you need to operate your business. Your ability to run payroll, pay suppliers and invest in the growth of the business is compromised. So what can you do?

Invoice factoring can help

Invoice factoring is a short-term funding solution commonly used by growing businesses to fix cash flow problems. It has grown massively in popularity over the last few years and is used predominantly by smaller businesses across a wide range of industries. Invoice factoring isn’t necessarily the most economical funding option for businesses that send out lots of invoices for small payments, but it can be extremely effective when used for larger invoices.

How does it work?

Once a factoring agreement has been set up, a company will send an invoice to a customer for products or services delivered as normal. It will also send a copy of the invoice to the factoring provider. The factor will then check the creditworthiness of the customer before releasing up to 90 percent of the value of the invoice as an advance payment within as little as 24 hours of the invoice being issued. The company will receive the balance of the invoice when it is eventually paid by the customer, minus the factor’s fee.

Many small businesses use invoice factoring in the early days because the factor focuses on the creditworthiness of the customer, rather than the business itself. That means smaller businesses without an established credit history can still access funding.    

How can invoice factoring improve cash flow?

  • It gives you access to quick cash – Businesses can receive quick payment for products and services they have delivered to customers. This releases the cash businesses need to invest in new opportunities, pay staff and buy stock. It also negates the threat of late payments which can damage the growth of small businesses.
  • There’s no debt – Factoring is a sale of assets and not a loan. That makes invoice factoring a potential solution for businesses that do not want to incur more debt. It also means, in many cases, there is no security required other than the invoice itself.
  • It eliminates collections – Most invoice factoring is known as ‘non-recourse’ factoring, which means the finance provider purchases all rights to the invoices and is responsible for the credit control and collections process. That means there is no need for a business to invest cash and resources into credit checking customers or collecting payments, which helps to free up cash.
  • You can take advantage of early payment discounts – Releasing the money that would otherwise be tied up in invoices allows businesses to take advantage of early payment discounts offered by suppliers. This can further help to improve its cash flow position.

Get a quote

Could invoice factoring help to solve your temporary or ongoing cash flow shortfall? Compare quotes from the UK’s leading invoice factoring providers or call 08000 24 24 51 to discuss the suitability of invoice factoring for your business with one of our experts.