How invoice factoring can help fund your business growth

When you’re a new or growing business, you may find yourself with a need to borrow money in order to meet outstanding orders. Overdrafts and credit cards can only take you so far, as credit limits are reached and exceeded.

There is another source of equity for your company that can help to fund your growth, a source that many business owners often don’t consider. That source is invoice factoring, a method of borrowing that uses your incoming invoices as a base for deciding the amount of your credit limit.

A new business often sees its steepest growth during the first year. That can cause cash flow problems as your incoming orders outstrip your credit with suppliers. Invoice factoring bases your cash needs against your outstanding invoices. Here’s how it works:

1. Your company invoices customers in the normal way.
2. You send a copy of the invoice to the factoring company.
3. The factoring company verifies that the invoice is legitimate.
4. An agreed-upon percentage of the invoice amount is made available as credit immediately.
5. The factoring company may keep books and manage accounts, sending reminders and other needed collection activity.
6. When the invoice is paid, the remaining percentage is released to your company.

With invoice factoring, you don’t have to wait for your customers to pay their accounts in order to access the money. Because there’s no need to apply for credit limit rises and wait for a decision, your business always has access to the cash flow you need to keep growing. Since your available balance is always a percentage of your incoming invoices, your credit limit grows with your business automatically. You’re always assured of sufficient working capital to meet your business needs.

Is factoring an appropriate way for your company to maintain a steady cash flow and raise needed capital? Invoice factoring is appropriate for your business if:

• your company does business to business trades
• you accept payment on credit terms
• the terms of payment for accounts for your business are clearly defined

Your business may not be suitable for invoice factoring if:

• you do the bulk of your trade directly to consumers
• most of your accounts are collectible upon delivery or paid in advance
• your business is one where payment due may be flexible, for instance in a construction business where payments may be delayed by contract terms for satisfactory completion of a project.

Costs of Using a Factoring Facility

There are two main costs associated with invoice factoring. The first is an administration charge, which is charged against a percentage of the invoice value, generally running from 0.5% to 1.5%. This charge is similar to the amount you’d pay an accountant for maintaining a sales ledger – which is precisely what the factoring company does for you.

The second charge is a discount charge against money advanced to you from the factoring company against the sales ledger. The discount is similar to interest charges on a loan, and is usually no more expensive than an overdraft facility, but far more convenient, as it always keeps pace with your growth.

To find out more about invoice finance and how it can help your business growth plans, contact us or visit the invoice finance page.