A new take on how factoring works

How factoring can offer entrepreneurs a flexible funding solution in tough times

When seeking finance, traditional overdrafts and loans are typically the preferred option, as they are an extra line of credit offered by the banks. As a result, many businesses have been left helpless as the banks become increasingly stringent on their lending criteria.

This prompts businesses to shop around for alternative approaches to small business funding, such as factoring, as the banks are no longer as credit-friendly as they were prior to the recession. Strangely enough, factoring is offered by the same high street banks and reputable independent lenders.

The reluctance by the banks to extend credit can cause a strain on entrepreneurs, as businesses trade on credit terms. Invoices can be left unpaid for 30, 60 or even 90 days – this can have a negative effect on your cashflow and prevent your business from expanding.

With factoring, you can receive up to 90% of the value of your outstanding invoices, sometimes within 24 hours of issuing the invoices. This can also include a credit control function, and you will receive the remainder invoice value balance once your customer settles their bill.

Widely viewed as an alternative to the traditional bank overdraft, factoring still has a long way to go when it comes to capturing the small to medium-sized business funding market.

How factoring works (a visual guide)

Though factoring can be an efficient working capital solution, only 43,000 organisations currently use factoring as a funding facility. A huge one million small businesses are unaware of invoice finance and its benefits.

Touch Financial has produced an infographic in a bid to spread the word about factoring services and its providers, educate small businesses on how factoring and invoice discounting work in a practical manner, and illustrate how this can be a flexible funding solution in today’s tough economic climate.

You can view the factoring infographic here:

Benefits of factoring over the overdraft

… As seen on the infographic, factoring can release cash which could be up to 4X an overdraft limit.

… Typically, any business could qualify for factoring as long as they’ve got invoices outstanding to other businesses. This includes loss-making firms, start-ups and sole traders.

… Factoring is more flexible than the overdraft. As your business grows, the funds released via factoring can also grow. Overdrafts are fixed maximum limits and you’ll have to renegotiate with the bank every time you need extra cash.

… Overdrafts may require that the facility be secured against business assets. Factoring is typically unsecured as the funds received are secured against monies already earned.

Touch Financial is the largest factoring and invoice discounting broker in the UK, with access to a range of commercial funding facilities offered by its extensive panel of lenders. For more information on Touch Financial, invoice finance or to request a quote, click here.

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