Invoice factoring – what is it?

Invoice factoring is the sale of a debt which allows a company to receive payment for an invoice immediately. Ordinarily an invoice will not be paid by a customer until the goods or services being sold are delivered in their entirety, and then there will be a payment period (typically 30 days) on top of this. If the invoice debt is sold to a factor (typically a bank or other financial organisation) then the normal arrangement is for 85% of the invoice amount to be paid immediately, with the remainder being paid once the customer has settled the invoice with the factor. Obviously the factor will charge for this service; there may be a fixed fee and/or interest on the debt.

Benefits of invoice factoring

If a company needs to make substantial investment in equipment or staff at the beginning of a job it can be useful, perhaps even essential, to have some of the money up front. For example, one UK factoring company describes how one of their clients, a marketing firm, suddenly increased their turnover tenfold when they won three large new contracts with blue chip companies. They needed to recruit new staff and produce new marketing materials at the commencement of the new contracts, which they simply couldn’t afford. The factor was able to provide the additional funds necessary when other providers of finance were unwilling to lend because of the extremely rapid growth rate of the company. There are many other examples; as the UK approaches Brexit, invoice factoring will provide a buffer for international traders who wish to grow their business in an increasingly uncertain environment.

Alternatives to invoice factoring

Obviously any business can approach banks, private investors and other sources of finance to borrow money, but borrowing against invoices raised removes the uncertainty about whether they will be paid – you are offloading this risk onto an invoice financier. However, invoice factoring is not the only way to do this. Invoice discounting is a simpler alternative method, whereby loans are made against an agreed percentage of the invoice value. As customers pay their invoices, the amount of the loan reduces, allowing for further sums to be borrowed against subsequent invoices. The advantage of this method of Invoice financing is that you stay in control of the invoicing and recovery process – with invoice factoring you hand over effective control of your sales ledger to the factor, and this is visible to your customers.

Sources of information and invoice factoring

The government website provides some basic information about invoice factoring at https://www.gov.uk/business-finance-explained/invoice-financing. All the large commercial banks offer a factoring service, but there are many other providers. If you decide that invoice factoring is the right approach for your business, you should seek out advice from your bank or get a personal recommendation. It is possible to find a factor by searching online – for example https://www.fundinvoice.co.uk/invoice_finance/list_invoice_finance_companies_uk.html lists over 80 organisations, and there are many others besides. However, as ever on the internet you should remember the motto “buyer beware”.