A SHORT GUIDE TO INVOICE FACTORING

Ever heard of ‘invoice factoring’ and how it can assist your small business or start-up?

If not, don’t worry, you are not alone! The term is slowly gaining momentum in business circles as more businesses take advantage of this fast growing financial practice.

Often referred to as ‘debt factoring’ or simply ‘factoring’, invoice factoring is a financial product that enables businesses to sell unpaid invoices (accounts receivable) to a third-party factoring company (a factor). The transaction allows the business to get cash up-front and not wait for customers to pay.

The practice of invoice factoring has only gained popularity over the last few years, however did you know that this type of financing actually goes back to more than 4000 years ago when it was common practice during the ancient times of Mesopotamia? It was used extensively during the Roman Empire and was of great use to merchants who conducted business in faraway destinations. Factoring enabled the merchants to fund expeditions and to remain afloat and thrive when business was low.

Similarly, European empires, including Britain utilised invoice factoring, with companies such as The East India Company and The Hudson Bay Trading Company having built their enterprises through this business practice.

Still hesitant? That’s ok. Lets look at a few more advantages that can assist you to make a decision that’s right your business.

• Improves cash flow – It is worth noting that often, factoring companies can provide you with cash within just 24 hours thereby allowing you to purchase or invest in much needed business equipment or resources without having to wait for the usual 30 to 120 days required for the payment of invoices.

• Alternative option for businesses failing to get loans – Factoring is a flexible option for businesses that have not been in business for a long time or don’t have strong financials. This often results in banks turning down loan applications. 

• Gives you more time, less stress – Factoring allows you to hand all the administration and chasing of payments to your factor who then collects the debt and manages your credit control.

• No limit on available borrowing - The ceiling to your borrowing is tied only to the number of authorised invoices sent out, so you aren’t reliant on long credit checking procedures and tedious paperwork to obtain additional funding when you need it.

• Improves your cash-flow control – Where you may have different credit terms for your customers, invoice factoring allows for improved cash-flow control.

• Long term liabilities are covered – Capital assets remain untampered with due to the leveraging of the value within your sales ledger, and access to finance is possible without the usual risk of huge debts.  

• Low risk for parties – No personal guarantees or collateral is required because lending is subject to work already done. Your factoring company, which collects payments, would most likely be highly effective with efficient procedures in place.

Whilst the advantages far outweigh the disadvantages, it would be prudent to be aware of the shortcomings of invoice factoring. These include reduction in scope for additional borrowing, loss of control over accounts receivable, customers taking exception to placing their debt in the hands of a third party thereby affecting your relationship with your customers, and if fees and charges seem high you may need to look at the possibility for long-term growth rather than a short-term situation.

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