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Small business invoice factoring

Choosing an invoice factoring company for you can seem like a daunting prospect for many small business owners. To make this easier we have created the ultimate guide covering everything from how small business factoring works to the costs involved. We have also listed the UK’s top invoice factoring companies.

What is invoice factoring for small businesses?

Invoice factoring is a way for small businesses to raise capital and improve cashflow. You sell your unpaid invoices to an invoice factoring company in return for a cash advance. The cash advance usually equates to around 80% of the invoice value which you receive within 24-48 hours of factoring your invoice. The remaining value of your invoice is paid back to you minus the factoring fees once it has been collected.

Invoice factoring is a great way for small businesses to inject cash into their business within a very short space of time.

Factoring small business options depend on a number of factors, and brings a range of advantages and disadvantages for your business. Weighing these up in the context of what options are available to you is important when choosing a factoring company.

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How does small business factoring work?

The nature of the invoice factoring arrangement will depend on your particular invoices. However, there are some basic concepts to understand.

The factoring company will look at certain variables. They will look at the invoices you wish to hand over responsibility for. They will look at the time scales, size, and likelihood of receiving timely payment. They will also look at your standing, longevity, and reputation. These variables allow them to work out how they will mitigate the risk of taking on the unpaid invoices.

Once this process is complete, which is usually quite fast, they will come back to you with their factoring agreement and terms.
Typically, the next steps will follow the below process:

  1. You sell your invoice/s to the factoring company
  2. You are then advanced the majority of the invoice amount, usually around 80%
  3. Once the invoice is paid, the outstanding balance (the remaining 20%) is forwarded to you, less the factoring fees.

Is invoice factoring right for my business?

Invoice factoring isn’t right for every small business, but for others it can be a lifeline and a way of maximising opportunity and growth.
If you need a flexible and fast source of cash and do not want the hassle of the administration work associated with the processing and collecting of unpaid invoices, invoice factoring is an ideal solution.

Although there are other ways you can raise cash, these tend to be slower to access or not available to small businesses. For example, small business loans are an alternative to small business factoring but they can be a much slower process. You may have also already ‘maxed out’ on bank or building society lending. Additionally, overdrafts do not tend to have the capacity that you require or favourable rates.

If you have reliable customers that pay their invoices by the end of the invoice period – let’s say 60 days – but your business struggles to keep up with other client requests or orders because you lack the cash flow to maintain the smooth operation of your business, then invoice factoring can provide a helping hand. Ultimately, invoice factoring can help you to grow, solve cash flow issues and take advantage of new business opportunities.

However, if you have unreliable clients with poor credit history who consistently fail to pay the invoice amount by the due date then invoice factoring may not be the best option for you as you could face late payment fees from the invoice factoring company.

Will small business factoring help my cash flow?

Yes. Small business factoring will help you to improve your cash flow via cash advances from your unpaid invoices. This is a major benefit of invoice factoring and is one of the main reasons why factoring is so popular among small businesses.

small business factoring benefits

Benefits and disadvantages of factoring small business

There are a range of both advantages and disadvantages to business factoring. Before going ahead with an invoice factoring company, you need to be sure that the benefits to your business are greater than the potential downsides.

On the plus side, factoring can:

  • Increase your cash flow quickly, without waiting for customers to pay
  • Reduce administrative pressures on your business due to processing invoices.
  • Help you grow by taking advantage of opportunities as they come, such as a new client or project
  • Enable you to make urgent purchases.
  • Reduce the time involved in the cash flow cycle, which can be limiting to small businesses who are unable to wait long periods for payment
  • Offer some protection against no, or delayed, payment, as the invoice becomes the factoring company’s responsibility
  • Remove responsibility, cost and stress of debt collection
  • Give you assurance over invoice payment

The drawbacks of factoring will depend on the nature of your business, and your outstanding invoices. However, disadvantages of small business factoring include:

  • Some customers may not like that you are using an invoice factoring company which could potentially impact your business reputation. However, some invoice factoring companies will work with you to find the best way of collecting payments to maintain good relations with your clients.
  • Some agreements can leave you liable if the customer doesn’t pay
  • Slightly reduced revenue because of the factoring fees. However, this can be outweighed by the advantages of immediate cash flow

Small business factoring costs

The cost of invoice factoring is important to consider. Costs are variable because they depend on variable factors. However, you will usually find that they are negotiable.

The main cost you need to consider is the discount (factor) rate. This is the fee that the factoring company charge you, usually on a weekly or monthly basis, for taking on the risk of the unpaid invoices and advancing the cash to you. The factoring charges are calculated on a percentage basis of the invoice value which typically range between 0.5 – 5%.

However, there are ways that you can minimise factoring fees. For example, with lower risk and greater volumes you can expect the factoring charges to lower. On the other hand, with higher risk and lower volumes you can expect higher invoice factoring costs.

In addition to the discount (factor) fee there are other factoring costs (LINK) which you should take into consideration.

Factoring companies for small businesses

Once you have decided that invoice factoring is the best option for your business you need to start considering which UK invoice factoring company will suit your needs most appropriately.

In addition to their fees you will also need to compare different companies based on their application process, how they evaluate your business, their reputation, and how they will safeguard your reputation with customers and clients.

For some small business factoring companies, you will need to have been in business for a certain amount of time and have a minimum turnover. You can self-select some companies based on these factors alone.

From here you will need to consider how much of the unpaid invoices that the factoring company will advance you (usually 80%) and how quickly you can get the funds (usually between 24-48 hours).

To help you consider which factoring company is best suited to you, we have reviewed three of the top UK small business invoice factoring companies.

Touch Financial

Fast and easy, Touch Financial can offer your business invoice factoring in as little as 24 hours, from a number of different factoring companies. Their process typically works by you raising your invoices as expected, before sending your invoice on to them.

They then pay you, within 24 hours, the pre-agreed percentage. Your chosen factoring company then collect the payment at the date you agreed with your client. If you prefer, they can collect the payment in your business name ensuring that there is seamless continuity for your client.

Touch Financial consider businesses with a turnover of at least £25k. The rates and fees vary, however, Touch Financial have an online invoice finance calculator which can help you get some idea of what to expect. They also have an excellent case study resource area, so you can see similar businesses to yours before considering them further.

Clear Funding

Clear Funding differ from some invoice factoring companies in that they do not charge set-up fees or use long-term contracts. Effectively it is an ‘on-demand’ service once you have set up an account, which is free to do.

You need to be a UK limited company and have been trading for over a year. You can then choose anything from one or more invoices to be factored. Clear Funding aim to get the money in your account within just a few hours, making this a very fast way of getting cash.

Clear Funding also have a handy online calculator so that you can gauge an idea of the fees involved. They have a clear and straight-forward fee structure.

Bibby Financial Services

Bibby Financial Services offer invoice factoring for small businesses which delivers the money to your account in a day. They aim to entirely remove your need for a credit control team.

They offer a confidential service, and offer a 3 month guarantee promise whereby if you are not happy with their service in the first few months, you can have a refund. They operate on a simple three step process. You invoice your customers directly, but send a copy to Bibby Financial Services. They then pass on a percentage of the invoice within 1 day, whilst subtracting their fee. They then do all the legwork to secure payment on your invoice, which, when completed, will be followed up with you receiving the final payment.

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