How to choose an invoice factoring company for your small business
If you are looking for ways to improve cash flow or increase funds for your small business, consider invoice factoring. Discover how it could help you
Choosing an invoice factoring company that’s right 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.
At this stage, it’s likely you have some queries about invoice factoring. In this article, we’ll provide you with the information you need to decide if invoice factoring could work for your small business.
Key questions covered include:
- What is invoice factoring?
- How does invoice factoring work?
- Which invoice factoring company is best for you?
- What are the main benefits and challenges of invoice factoring?
What is invoice factoring for small businesses?
Invoice factoring is a way for small businesses to raise capital and improve cash flow. You sell your unpaid bills, or 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.
A good way for entrepreneurs to inject cash into their business, options for small business factoring depend on a number of factors but also bring advantages and disadvantages. Weighing these up in the context of what options are available to you is important when choosing a factoring company.
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Find out more on our what is invoice factoring page now.
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.
Factoring companies will look at certain variables which will allow them to work out how they will determine the risk of taking on your unpaid invoices.
These variables include:
- The invoices you wish to hand over responsibility for
- The time scales, size, and likelihood of receiving timely payment
- Your standing, longevity, and reputation
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:
- You sell your invoice(s) to the factoring company
- You are then advanced the majority of the invoice amount, usually around 80%
- Once the invoice is paid, the outstanding balance (the remaining 20%) is forwarded to you, less the factoring fees
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 invoice factoring company in the UK 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, or to 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 some of the top UK small business invoice factoring companies and brokers. The table below contains a quick side-by-side comparison, with more information about each company included further down.
|Invoice Factor||Feature||Good for|
|Touch Financial||Online invoice finance calculator||Businesses with over £25,ooo+ turnover|
|Clear Funding||Clear and straightforward fee structure||UK companies trading for over one year|
|Bibby Financial Services||Offer a simple three step process||Small businesses needing capital|
Touch Financial is a broker that can help find you an invoice factor in as little as 24 hours. Its process typically works by you raising your invoices as expected, before sending your invoice on to the company offering the best deal.
They then pay you the pre-agreed percentage within 24 hours. They will also collect the payment from your client on the date you agreed. If you prefer, they can collect the payment in your business name ensuring continuity for your customer.
Touch Financial consider businesses with a turnover of at least £25,000. The rates and fees vary, however, so Touch Financial has an online invoice finance calculator which can help you get some idea of what to expect.
Although posted several years ago, Touch also has a case study resource area, so you can see similar businesses to yours before committing.
- Receive funds in 24 hours
- Payment can be collected in same business name
- Your business must have a turnover of at least £25,000
Clear Funding differ from some invoice factoring companies in that it doesn’t 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.
Clear Funding also has a handy online calculator so that you can gauge an idea of the fees involved.
- Flexible, on-demand service
- Select one or more invoices to be factored
- Must be a UK limited company trading for over one year
Bibby Financial Services
Bibby Financial Services offers invoice factoring for small businesses which delivers the money to your account in one day, aiming to entirely remove your need for a credit control team. It also offers a discreet service so your customers don’t have to know you’re using an invoice factoring company.
They operate on a simple three step process:
- You invoice your customers directly, but send a copy to Bibby Financial Services
- Bibby then passes on a percentage of the invoice within one day, while subtracting their fee
- Bibby then do all the ‘legwork’ to secure payment on your invoice, and send your final payment
Bibby’s main benefits are listed below:
- Money delivered in one day
- Maintain direct contact with your customers
What to look for in an invoice factoring company
After understanding what invoice factoring is and comparing companies, it’s worthwhile to consider some other aspects to help you find the best option for your small business. Additional features to consider include:
- Financial regulation: Is the company recognised by, or a member of, a trusted financial body or organisation, such as the Financial Conduct Authority (FCA) or UK Finance, if applicable
- Industry recognition: Look at reviews from other small business owners who have used the company’s services; has the company been nominated for, or won, any awards?
- Specialism: Think about choosing an invoice factoring company that offers expertise in your sector to better understand your business needs
Industry-specific invoice factoring
While some invoice factoring companies will accept small businesses from a range of sectors, others offer specialised services for specific industries. Examples of expertise and the industry-specific issues focused on include:
- Time frame: Offer understanding of the unique timeframes that apply in the industry
- Materials: Construction-specific factoring can help to make necessary materials available to you as soon as you need them
- Subcontractors: Specialist invoice factoring can assist in any payment gaps between contractors and subcontractors
- Flexibility: If you require funds for a one-off hire or an ongoing job, industry-specific invoice factoring could be useful
- Repairs: Ensure a smooth workflow by using funds for vehicle maintenance when you need it
- Growth: Expand upon your logistics business offering to meet demands of the market with relevant knowledge
- Balance: Invoice factoring specific to recruitment can help with ensuring balance between receiving a brief and placing candidates
- Flow: Maintain continuity throughout the recruitment process
- Payments: Manage the difference between weekly and monthly payment cycles
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 costs
The cost of invoice factoring is important to consider. Costs are variable because they depend on a number of criteria. 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 which you should take into consideration. These will usually fall into either of the following two categories:
- Administrative charges
- Penalty fees
Follow the link to find out more about invoice factoring costs.
Benefits and challenges of factoring for small businesses
There are a range of both advantages and disadvantages to 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 non- 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
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.
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.
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.
In addition, if you are raising international invoices or collecting funds in multiple currencies, then invoice factoring is less suitable. If this applies to your small business, export finance is worth considering.
Compare small business invoice factoring quotes
The information on this page should help you to understand what kind of things you need to look for when considering small business invoice factoring. For more detailed information though, you can speak to suppliers today – we can help with this process.
To compare quotes from up to four invoice factoring companies, simply complete the form at the top of this page. The process is free, quick and easy, and it could help your business to save time and money.