How long does your company wait for payment from customers? Many companies offer 30 or 60-day trade credit to their customers, creating a delay between sale or delivery of a product or service and payment.

If your company offers trade credit to its customers with 30, 60 or 90-day payment terms, it can speed up its cash flow and create a predictable payment system using a solution called invoice factoring.

Invoice factoring involves your company selling its accounts receivable in exchange for immediate payment. The factoring company, which buys your invoices, offers a percentage of the invoice as an advance, typically 80 to 90% of its total value.

Your company benefits thanks to instant cash flow and a level of predictability that typically isn’t available. The factoring company manages collections and provides the rest of the invoice, minus its processing fees, upon payment by the customer.

Invoice factoring is a great solution for companies that have a predictable, steady flow of payments from customers and a great credit score, but need help creating short-term cash flow due to a cash flow crisis or unexpected financial issue.

Quick facts about invoice factoring

• Invoice factoring involves your company selling its accounts receivable to a factoring company. The factoring company advances most of the invoice to your company, resulting in immediate cash flow.
• Since the factoring company manages collections, your company does not need to chase up its customers to receive payment. You’ll receive a part of each invoice after it’s paid by the customer.
• Factoring companies typically charge a small fee for their services and offer the initial percentage of each invoice based on your company’s credit score and trading history.
• Since factoring is secured against your company’s accounts receivable, it’s a less risky option for lenders than traditional loans. This makes it an option for companies that lack the credit history for other forms of lending.
• Because there are service fees associated with each invoice your company sells to a factoring company, invoice factoring is best suited for companies with a small number of high-value invoices.

What is invoice factoring?

Invoice factoring is a cash flow solution for companies that have large amounts of accounts receivable that they would like to convert into cash. Using factoring, any business that’s owed money by its customers can generate short-term cash flow.

When your company sells an invoice to a factoring company, a percentage of the invoice’s value (typically 80 to 90 per cent, or more) is provided to your company immediately. The remaining amount is paid after the invoice has been paid.

The factoring company will collect on the invoice and deduct a fee for its services from each payment it receives. Factoring is a relatively inexpensive way for your business to improve its cash flow without using traditional financing options.

Although invoice factoring is most commonly used to improve cash flow, it’s also useful for companies that would like to simplify collections by contracting a third party, or companies that plan to expand internationally into new markets.

When should your company use invoice factoring?

Factoring is most frequently used to improve cash flow for businesses that have limited cash available to pay staff, suppliers and creditors, as well as trade credit terms with customers that provide slow but steady cash flow.

For example, a company that extends net-60 trade credit to its customers but has creditor payments due every 30 days can use invoice factoring to provide cash for paying creditors before it would traditionally become available from customers.

Your company should use invoice factoring if it’s financially stable but needs help generating steady, prompt cash flow. Factoring is not a solution for insolvent and distressed companies that have no clear sources of income.

Invoice factoring is an excellent option for relatively young businesses that need help accessing credit. Many factoring companies will be able to provide cash for your business, even if banks and traditional lenders are unresponsive.

This is because factoring companies use your customers’ credit history in order to assess the risk of providing a cash advance on your invoices, rather than the history of your business – the key metric used by banks to assess lending risk.

Since factoring is a versatile financing solution, it’s used by companies to make up for slow trade credit terms, as a stop-gap solution for cash flow issues or simply to provide stability as a company grows.

If your company is insolvent, factoring may not be its best solution. Other options for insolvent companies include proposing a CVA, entering into administration or raising cash through an emergency loan.

Factoring is a public process, as your company’s customers will pay the factoring company rather than your business. It’s unlikely that factoring will have a serious impact on your company’s relationship with its customers.

How much does invoice factoring cost?

When your company works with a factoring company, payment of each invoice is split into two parts. The first part is a payment of 80-90% of the invoice delivered upon its sale, while the second part is a payment after the customer pays.

Factoring companies charge a fee for each invoice that your company sells. This fee varies based on the value of each invoice. This makes it more cost-effective for your company to use factoring to generate cash from a small number of large invoices.

Companies with high-value invoices will find factoring a relatively inexpensive way to generate cash flow. However, companies that sell low-ticket products or services to many customers will find factoring uneconomical due to per-invoice fees.

Get expert financial help

Does your company need help generating cash flow? If your company offers trade credit to its customers and waits 30 or more days from the end of each month for payment, factoring could improve its cash flow and prevent solvency issues.

Factoring can be used by solvent companies that need a stop-gap solution to cash flow issues or by companies struggling under creditor pressure that need cash to prevent a winding up petition from being filed.

Contact us to speak to a finance expert and learn more about the invoice factoring process. We can provide help and assistance to ensure your company receives the cash it needs to pay its creditors, avoid liquidation and keep trading.