Factoring Companies | Comparing Invoice Factoring Options

24-January-2024 13:20
in Commercial
by Sam Hodgson
Factoring Companies

Factoring companies can help you solve one of the biggest problems for businesses in the UK: cash flow.

When cash flow is good and there's a comfortable positive bank balance, it's possible to invest in the future and grow the company. If a business struggles with cash flow, however, it can feel choked, and unable to move forward or cover important costs.

For many B2B businesses, the delay between an invoice being submitted to a client and its payment is the largest contributor to poor cash flow.

The work is done, salaries must be paid, and expenses accounted for, but the money is tied up in someone else’s hands - it can be a trying time.

But invoice factoring provides an answer to this cash flow problem.

With invoice factoring, the business sells its accounts receivable (the outstanding invoices) to a third party - the factor - that releases the majority of the cash immediately and takes on the burden of reclaiming that value from the end client.

In this guide, we break down the specifics of what invoice factoring is and how it works, the differences between various factoring companies, and what to look out for when you're comparing your options.

And also (spoiler alert) why it can be good to speak to an invoice factoring broker, like ourselves, who can actively compare quotes from factoring companies across the market, specific for your business needs, instead of just going with the first quote you get or trying to compare products by yourself.

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In This Guide

How Does Invoice Factoring Work?

The Pros and Cons of Invoice Factoring

Misconceptions about Factoring Companies

Alternatives to Invoice Factoring

Compare Invoice Factoring Companies With Us 

How Does Invoice Factoring Work?

Invoice factoring is not a one-off deal, but an ongoing relationship between your business and the factoring company. Once the relationship is established, invoices can be passed to the factoring company as needed and the money cleared almost immediately.

The process is as follows:

1. Apply and Set Up

You choose a factoring company and enter into an invoice factoring contract with them. Typically, this is for a 12-month term and will incur the first two of three fees - the setup fee that covers the early administration, and the service fee, calculated as a percentage of your business's annual turnover, which pays for the ongoing management of your invoice factoring.

2. Invoice Your Customers

You work for your clients and customers, supplying them with goods and services as normal, and invoice them in the normal way.

3. Pass Invoices to the Factoring Company

Any invoices that you wish to be factored are then passed on to the factoring company, who will take over the credit control aspect of the invoicing and debt recovery.

4. Get A Line of Credit

A line of credit facility is made available to you based on the value of the invoices you have supplied. This can be as much as 90% of the total invoice value, though the specific amount will be determined by your factoring contract.

While the line of credit is in use, the finance fee will be calculated on a daily basis.

5. Customers Pay Invoices

The factoring company will work directly with your clients and customers to recover the value of the invoices. Credit control will be undertaken by them without your involvement required.

6. Release of Funds

The factoring company will release the remaining invoice value, minus the total of all accumulated fees.

7. Repeated Use

With the factoring contract and line of credit established, you are able to pass further invoices for factoring as needed, repeating the process until the end of your factoring contract term.

8. Extend Contract

Should you wish to extend your contract with the factoring company, this can easily be done.

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The Pros and Cons of Invoice Factoring

Invoice factoring has a clear advantage in that it allows you access to your money quickly and smoothly, without any need to worry about the length of invoicing terms.

  • Pay staff and other costs without delay
  • Have cash available to seize opportunities as they arise
  • Grow your company without waiting
  • Avoid leaning on more restrictive and expensive credit, such as credit cards
  • Concentrate on your business rather than invoice and payment administration
  • Gain the benefits of a structured credit control system
  • Improve business credit score

On the cons side, in addition to the obvious cost of fees, the involvement of an invoice factoring company can sometimes be misinterpreted by your clients who may become confused and even upset.

This disadvantage is often easily mitigated by clear communication with customers and an explanation of the invoice factoring company’s involvement if needed, however, it is worth bearing in mind when considering factoring.

Invoice Factoring Companies

Misconceptions about Factoring Companies

There is some confusion about invoice factoring and factoring companies that benefit from greater understanding.

Factoring Companies are NOT Debt Recovery Agents

One of the benefits of using a factoring company is that the chasing of late invoice payments becomes someone else’s responsibility, however, a factoring company is not a full debt recovery agency and ultimately, making sure that an invoice is paid still lies with you.

The specifics of whose responsibility unpaid invoices remain will be down to the individual factoring company and the factoring contract, so it is worth considering from the outset.

That said, the professionalism and status of a factoring company is enough in itself for many clients to take their liabilities more seriously - often the use of a factoring company will make businesses who tend to pay late or try to avoid their responsibilities improve in their outlook!

Invoice Factoring is Not a Loan

Invoice factoring is a line of credit facility provided as an arrangement between the factoring company and your business; it is not technically a business loan.

Another form of invoice finance, known as invoice discounting is a loan that is provided using the accounts receivable as collateral.

Read our articles on invoice discounting for more information.

Not All Factoring Companies Are the Same

There is a tendency for businesses looking for invoice factoring to lazily assume that the terms one factoring company offers will be near-identical to another.

This is not the case.

Invoice factoring is not currently regulated by the FCA in the UK, which both helps to keep the costs of factoring down and also allows for a wider range of factoring services.

But this is why it is worth looking at several factoring companies before making a final decision as to an arrangement.

At Clifton Private Finance, we compare options from various companies that specialise in different business areas, all with varying terms and products that suit varying clients. 

To learn more about how we can help, book a free consultation with a broker today.

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Alternatives to Invoice Factoring

As with any form of business finance, there are multiple different products that serve similar functions.

In the case of cash flow and invoicing management, the following offer an alternative to a factoring company that may be more suited to your specific need:

  • Invoice discounting - Another form of specialised invoice finance, invoice discounting has the benefit that it is transparent and not known to your customers.
  • Merchant cash advance - If your business does most of its business directly with customers through card transactions, invoice factoring is unlikely to be an effective solution. Consider merchant cash advances for B2C companies.
  • Unsecured business loan - While the interest terms may be greater than the equivalent fees for invoice factoring, an unsecured business loan is a simple alternative to a factoring company arrangement.
  • Credit cards and overdrafts - If your cash flow needs are short-term, easily obtained line of credit facilities such as credit cards and overdrafts may offer a simpler solution. However, be aware of high rates and the slippery slope of ongoing dependency problems.

At Clifton Private Finance, we work with all of these products, and can have an open and transparent conversation with you as to what's best for your business. Then, we'll compare offers from the companies that offer that type of finance. 

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Compare Invoice Factoring Companies With Us

Is invoice factoring right for you?

At Clifton Private Finance, we have a team of professionals available to discuss the various options available and find the right factoring company for you. Contact us today to find out how we can help you improve your cash flow situation.

To see what we can do for you, call us on 0203 880 8890.