Choosing the right Invoice Factoring Company for your business.
Invoice factoring companies can vary their costings and processes just as much as any business. This doesn’t necessarily mean that one is better than the other, when seeking invoice factoring for your business, take the time to find the right fit for your business funding needs.
Invoice discounting and factoring fall under the umbrella term “Invoice Finance”, within the UK it is classed as alternative financing. It is a popular method of funding, especially for SME’s and those who may not be eligible to receive traditional funding (such as a bank loans). In June 2023, The Bank of England raised interest rates by 5%, which in turn increased difficulty for businesses to secure a loan. Cash flow constraints increased, leading businesses to seek a quick cash injection or risk losing their business.
Throughout this period businesses who hadn’t yet considered it an option, turned to invoice finance. A proven method of business funding which not only improves cash flow, but also leads to sustainable growth.
Throughout this blog, we will talk through the history and evolution of invoice factoring, how factoring works plus its benefits.
Learn how choosing the right invoice finance provider can lead to better client relationships.
History and evolution of invoice factoring.
Factoring is believed to have originated around 4,000 years ago during the reign of King Hammurabi in Mesopotamia. In ancient Italy, the practice involved advancing funds against the delivery and payment of exported grain. Jewish businessmen further developed this concept by lending money to exporters, using invoices for grain sales as collateral.
Invoice factoring has since evolved, however, the concept behind it remains the same. The business sell its upcoming invoice to receive a pre-payment of the invoices value. By selling their accounts receivable, the business in turn can improve its working capital and leads to a naturally steady cash flow.
Credit control is now included within the evolution of this funding solution. For some companies, sales ledger management and credit control are easily available resources. However, some companies struggle with managing their credit control, thus creating cash flow issues and negatively affecting working capital.
How invoice finance works and its benefits.
As we’ve mentioned above, the business sells its accounts receivable to receive a prepayment on the invoices value. Typically, the provider will fund up to 80% of the invoices value. Once the debtor has paid off the invoices value to the provider, the business receives back the difference – minus factoring fees.
The associated factoring fees impact how much factoring costs, which means, the costing isn’t the same for each company. For example:
Customer creditworthiness: Businesses with customers deemed high-risk by the factor are likely to face higher fees to compensate for the increased default potential.
Invoice payment terms: Longer payment terms result in a higher discount fee due to the extended time the debt is outstanding.
Invoice volume and value: Businesses with a high volume of low-value invoices often incur higher factoring fees compared to those with fewer, larger invoices, especially if outsourced credit control is used, due to the additional service being provided.
Contract length: Longer factoring contracts can potentially lead to reduced fees as it provides the funder with predictable cash flow and a guaranteed client relationship for a longer defined period.
The benefits of invoice factoring.
Invoice factoring includes the additional facility of outsourced credit control. Once the business has raised the invoice and notified the provider of the sale – their workload ends. This is when the provider takes over and manages their sales ledger to the point where the debt is paid.
Sales ledger management is fundamental for cash flow; however, it is time consuming. Often small businesses, or inexperienced business owners can let this aspect slide. Leading to potential losses in revenue, and impacted cash flow. With outsourced credit control the business gains back time and resources which can be distributed to benefit the business.
In the background, the business is still benefiting from receiving an advanced percentage of their upcoming invoices. Meaning that they have access to cash which otherwise would be tied up, with extra time and funding: the business can seek new opportunities and actively strive for growth.
Understanding you business needs - choosing the right partner.
While invoice factoring offers numerous benefits, selecting the right provider is crucial for maximizing its impact on your business. Each company has unique financial circumstances, growth aspirations, and credit control requirements. Therefore, a one-size-fits-all approach to invoice factoring is unlikely to yield optimal results.
Key factors to consider when choosing a provider include:
Cost Structure: Compare factoring fees, interest rates, and any additional charges. Consider the overall cost-benefit analysis in relation to the improved cash flow.
Advance Rates: Evaluate the percentage of the invoice value that the provider will advance. Higher advance rates provide quicker access to funds but may come with higher fees or hidden caveats where retentions or concentration issues come into play reducing the headline rates.
Credit Control Services: Assess the provider’s credit control capabilities and how they align with your business needs. Some companies may require extensive credit control support, while others have more robust internal processes.
Flexibility: Consider the provider’s ability to adapt to your business’s evolving needs. Can they accommodate changes in invoice volume, customer base, or payment terms?
Customer Service: Evaluate the provider’s responsiveness, accessibility, and willingness to support your business. A strong customer service relationship is essential for a smooth factoring experience.
Building stronger client relationships.
Interestingly, invoice factoring can indirectly contribute to strengthening client relationships. By improving cash flow, businesses can invest more time and money in customer service, product development, or sales reach. This enhanced ability to meet customer needs can foster loyalty and referrals.
Open and consistent communication about invoices and payments builds trust whilst strengthening customer relationships. Outsourcing credit control allows you to focus on sales, while maintaining positive customer interactions.
Invoice factoring has evolved from a simple financing mechanism to a comprehensive financial solution that can drive business growth. By understanding the history, mechanics, and benefits of factoring, businesses can make informed decisions about whether it’s the right fit for their financial strategy. Careful selection of a factoring provider, combined with a focus on customer satisfaction, can unlock the full potential of this valuable financial tool.
Partnership Invoice Finance - we're the right provider.
We at Partnership Invoice Finance offer a personalised approach to recourse factoring that goes beyond traditional financial solutions. We understand that every business is unique, and our services are tailored to meet your specific needs. Our dedicated team takes the time to grasp your financial landscape, enabling us to craft a factoring solution that aligns perfectly with your business goals.
We believe in building enduring partnerships founded on trust, transparency, and exceptional service. By entrusting your sales ledger management to us, you’ll gain the freedom to focus on core business activities without the burden of credit control. Our personalised approach ensures efficient debt collection, accelerating cash flow and enhancing your overall financial health.
Experience the difference a truly dedicated factoring partner can make. Contact Partnership Invoice Finance today to embark on a journey towards financial optimisation and growth.
