What is invoice factoring?

For many companies their sales invoices are the largest asset in their balance sheet. If you run your own business you may be aware that invoices get converted into cash at a slow rate, often presenting 2 or 3 months’ worth of sales. When you are experiencing this type of situation you can use invoice factoring to generate cashflow. It can also help you reduce your administration costs.

Invoice factoring involves selling your invoices to a third party. In exchange they process the invoices. These third parties are called factors or debt factoring companies.

What are the benefits of invoice factoring?

Using invoice factoring services can give you greater flexibility to access outstanding debts and improve your cashflow, releasing it for key business activities such as:

• better working capital for start ups and mature businesses
• extra sales ledger management
• capital hungry projects
• acquisitions or
• rapid business growth.

What do I need to be aware of with invoice factoring?

Invoice factoring operates best when a business is tightly run with few disputes and queries over invoices. Issues like these can slow down the release of cashflow. Other points include:

• whilst invoice factoring is competitively priced, you will be charged for factoring services
• you can reduce your chances of borrowing money as book debts won’t be able to be used for security
• some factors may wish to vet your customers which may impact on your business practices
• ending agreements with factors can be difficult as you need to repay any money they have advanced you on invoices that customers won’t have paid back at this stage and
• some of your customers may prefer to work solely with you.

The relationship that your factor builds with your customers will affect how customers regard your business. Make sure you use a factor who will help maintain your professional profile.