Why businesses use invoice factoring solutions and who it suits most
Invoice factoring solutions are used by thousands of businesses in the UK currently to support their activity, yet many are still unaware of the benefits this funding product can bring.
Aided by the level of choice provided by the variety of banks and independent lenders which include it amongst their portfolio of lending products, there are numerous reasons why companies choose invoice factoring as their preferred funding solution:
- The funding bridges the cash flow gap between paying suppliers and getting paid
- Credit control expertise helps to reduce in-house overheads and improve collection times
- More flexible than overdrafts and bank loans, as funding grows in line with sales ledger
- Credit protection can safeguard against debtor insolvency or protracted default
- Improved cash position can help you secure supplier discounts
Here we look at some of the types of companies that benefit most from invoice factoring solutions. Could your business benefit too?
Whilst growth is an exciting time for a company, it also presents some challenges when trading on credit terms (see point 7 of these common causes of cash flow problems).
A steady cash flow is needed to facilitate growth, whether due to higher costs, the need to purchase more materials from suppliers or perhaps to increase headcount within the business.
Rather than waiting sometimes up to 90 days or more for payment from your customers, invoice factoring solutions release up to 90% of an invoice’s value within 24 hours of its issue.
Plus, the funding that’s released corresponds with the business’s growth.
So, whether you’re raising three or 300 invoices each month, cash flow will continue to flow, allowing you to grow comfortably.
Invoice factoring can be an ideal funding solution for new companies.
Whilst a start-up’s lack of credit history, cash flow statements or balance sheets would make it difficult for them to qualify for a traditional bank loan, invoice factoring is secured against your customers’ credit history instead.
Plus, funding grows in line with your sales ledger, providing the flexibility that’s required in the early stages of business.
Companies which experience highly seasonal trading patterns can find it challenging to successfully manage their cash flow throughout the year.
In these circumstances invoice factoring solutions are beneficial as its flexible nature allows you access to working capital when you need the money most – whether that’s during the busy periods to meet increased demand or as a way to better manage cash flow during the slower periods.
As well as the funding and cash flow benefits, smaller businesses which lack the necessary internal resources to dedicate to credit control will benefit from the additional services that invoice factoring solutions provide.
With the option to include a dedicated sales ledger management service and/or credit protection, invoice factoring can reduce in-house overheads, improve collection times and protect against late payment all whilst boosting cash flow.
Companies with a poor credit history
Businesses that are recovering from a challenging financial period or have had problems repaying loans in the past also benefit from invoice factoring solutions. That’s because factoring companies look at the creditworthiness of the customers rather than the business applying.
If your business has been rejected for funding due to a poor credit history, this blog on 7 alternative ways to fund your business could highlight a different facility that would be worth exploring.
Which industry sectors are most suited to invoice factoring?
The cash flow benefits and its flexible nature make invoice factoring a suitable solution for a wide range of companies across various industries, as long as they trade on credit terms.
Here are a few of the industry sectors which are most suited to factoring and why.
The construction industry is widely acknowledged as a sector with one of the worst payment records in the UK.
The use of retentions combined with the hierarchy of contractors and sub-contractors are just two of the reasons for the long delays in payment.
Invoice factoring is able to overcome these issues by bridging the cash flow gap between paying suppliers and getting paid to ensure steady cash flow.
A specialist form of invoice factoring, known as construction finance, specifically helps contractors and sub-contractors in the construction industry to gain fast access to working capital advanced against applications for payment.
By releasing funds against certified or uncertified applications for payment or stage invoices, construction finance boosts working capital so that you can take on new projects, order materials, hire staff and grow your business with confidence.
Manufacturing companies need a readily available source of supplies and materials in order to remain competitive and meet demand. Unfortunately, cash flow challenges can make this difficult.
With an ongoing cycle of machinery repair and maintenance costs, plus all the usual business expenses, companies can find cash flow difficult to manage.
Waiting for payments to come in so that new orders can be fulfilled can be frustrating. But, with invoice factoring, this wait can be significantly reduced.
Plus, the amount you can borrow is linked to the amount of work you invoice so you can grow your business effectively without the worry of overtrading.
Recruitment companies can find managing cash flow challenging due to the requirement to pay temporary workers and contractor staff while waiting for their invoices to be paid by clients. Back office administration and timesheet management can also be a big overhead for recruiters.
Invoice factoring relieves these pressures through facilities called recruitment or payroll finance. Just like with traditional invoice factoring solutions, these facilities release working capital from invoices so that you can meet your payroll commitments and turn your attention to other aspects of your business.
However, funders can additionally provide vital back office and administrative support across the business, helping recruitment companies to focus on growth.
Long credit terms are typically standard practice in the wholesale industry, even more so when the company imports or exports goods.
This can put a massive strain on cash flow. But, with an invoice factoring facility in place, wholesalers can overcome these cash flow challenges and avoid tying up their cash flow for long periods.
Tailor-made invoice factoring solutions for importers and exporters even exist to help you trade internationally with peace of mind.
Professional service providers such as architects, engineers, lawyers and financial advisors also often benefit from invoice factoring solutions.
Within these businesses there is often a big focus on client relationships.
Unfortunately, when trading on credit terms these relationships can be strained when forced to wait long periods for payment.
Not only is it time-consuming to chase the payments, there is also the danger of upsetting and potentially losing a valued client.
However, by using invoice factoring solutions, these companies can release working capital quickly and access a dedicated sales ledger management service to save time and enhance customer relationships.
The facility can even be provided confidentially, allowing you to benefit from the factoring company’s credit control expertise whilst keeping your finance arrangements private from your customers.
Haulage and distribution
One of the biggest challenges for haulage and distribution businesses is maintaining a healthy cash flow whilst contending with numerous fluctuating costs such as fuel, wages and vehicle maintenance costs.
This can then make it hard to hire drivers or take on additional jobs without jeopardising financial plans for the month.
By using invoice factoring these businesses can bridge the cash flow gap between paying these costs and getting paid by their customers. Plus, the flexible nature of invoice factoring allows businesses to scale funding up or down to meet their cash flow needs.
This ensures businesses can adopter faster response times and remain competitive.
Printing and publishing
Most businesses experience some level of cash flow gaps between paying their suppliers and getting paid. But for printing and publishing companies this problem is often magnified.
There are freelancers to pay, who may require payment according to different schedules, plus staff wages, equipment costs and various other overheads to account for all whilst waiting for payment according to clients’ schedules.
Fortunately, with invoice factoring printing and publishing companies don’t have to wait the customary 30 to 90 days before payments come in.
A percentage of each invoice is quickly advanced by the factoring company, instantly improving cash flow and allowing the business to meet their own payments on time.
So, what could invoice factoring do for your business?
Our quote tool will provide an instant indication of how much funding invoice factoring could release against your sales ledger. It doesn’t take long to complete and should help you to visualise the benefits it brings.
Alternatively, you could discuss your funding options with one of our funding consultants. Give them a call on 0800 9774833 or request a call back and they’ll contact you at a convenient time.
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