The Pros and Cons of Factoring Invoices

You’ve been running your business a while, or maybe you’ve just started one and you’re finding reliable cashflow is a problem, as you wait for invoices to be paid.

You’ve got great customers – creditworthy, consistent payers, but you’re experiencing pressure on the finances in the time between you issuing the invoice and receiving payment.

While you wait for payment, you need to find the cash to pay your own suppliers or staff. This means you might have to make a choice over dipping into your savings, using your overdraft or applying for a bank loan to tide you over until you’re paid. Applying for an overdraft, loan or credit card to bridge the cashflow gap adds debt to your business.

Waiting for invoices to be paid can also impact your ability to take on new orders, negotiate better terms with suppliers and expand into new markets.

Factoring your invoices allows you to better manage cashflow in your business, without adding to your debt profile. Factoring facilities that manage customer payment collections also allow you to focus your time on other business operations.

To be considered for factoring, you need to be creditworthy and have creditworthy customers. Whilst you don’t receive the entire amount of your invoice upfront with factoring, you do receive the majority of the cash a lot faster than if you were waiting for your customer to pay.

There’s an advantage here that it helps you manage your business better. Knowing that you’ll receive payments in a timely manner, means you may be able to negotiate early payment discounts with your suppliers.

Having a regular cashflow allows you to plan better marketing initiatives; buy essential kit and employ more staff to keep up with demand. Having peace of mind, means you can focus on the strategic side of developing your business, instead of chasing payments.

Invoice factoring works by ensuring you receive payment, usually within 24 hours of your invoice being issued – much better than waiting for 30 to 120 days, depending on your customer payment terms.

Like any decision to be made, you want to have the full facts. Here we look at the advantages and disadvantages of choosing invoice factoring as a solution.

Advantages

You get access to your cash, usually within 24 hours of issuing your invoice.

You can organise preferential payment terms for your suppliers, knowing that you’ll receive faster payments from your factoring organisation.

Utilising the value within your sales ledger means your capital assets remain untouched.

Working with a factoring organisation means you’re likely to have a better understanding of the creditworthiness of your customers, meaning you could offer better payment terms to win their business.

Factoring providers take a future focused approach to your business. They will look at your expertise, creditworthiness and the quality of your customer pipeline, even if you have bankruptcy in your past.

The amount you factor grows as the number of invoices grow. The amount you can access is tied to the number of invoices issued so there’s no administration needed to apply for further credit.

You don’t need to be a huge business to access invoice factoring.

Disadvantages and considerations

Cost is a consideration, so make sure you know what added value a factoring organisation can offer you when reviewing their fees.

The administration involved can require time and attention – some factoring organisations enable you to do all of this online which speeds up the process – ask when you enquire.

Factoring providers may contact your customers to let them know they are managing your invoices, but this does not have to be the case. You can state how you prefer to work, retain control of your customer communication and keep the service confidential.

Make sure you understand upfront any clauses for exiting the agreement.

What next

Having the headspace to drive your business growth is essential. Invoice Factoring allows you to focus on the important stuff that will help you grow your business.

Bibby Financial Services offers a variety of factoring solutions. To find out how Bibby Financial Services can add value to your business, Contact Us or call the team direct on 65 6922 5030.