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What is Invoice Factoring?

Invoice Factoring describes the process where a business sells its invoices to another company. This company, also known as the Invoice Factoring provider, advances you up to 100% of the invoice value, minus a fee, then collects the balanced owed from your customer.

So, you don’t need to wait around for an invoice to pay out. By factoring your invoice, you give up ownership and receive the cash while the provider takes care of further admin and debt collection.

How can Invoice Factoring help my business?

Invoice Factoring immediately releases cash tied up in invoices that take up to 90 days to pay out. This means that your business gets a fresh cash injection, which you can use to grow your business, boost sales, or complete inventory.

Also, you won’t have to worry about following up with your customers with their payment, as the provider takes care of everything. You are free to continue running your business.

Is Invoice Factoring the same as Invoice Discounting?

No. While both unlock cash tied up in your invoices, the difference is that Invoice Discounting leaves you in control of your sales ledger and debt collection. This means that your customers won’t know about your arrangement with the Invoice Discounting provider. However, you are responsible for making sure they settle their invoices on time.

It’s not a question about whether Invoice Factoring or Invoice Discounting is better. What it comes down to is which one is the best fit for your needs. If you prefer to let the provider handle everything while you focus on your business, then Invoice Factoring is the best choice. But if you want your arrangement to remain confidential, then Invoice Discounting is what you want.

Is Invoice Factoring the same a loan?

No. Invoice Factoring involves selling your entire invoice to a third party, who advances you the cash and collects payment from your customers. Loans require you to repay the lender and are based on your business’ creditworthiness, rather than your customers.

How much cash can I unlock from my invoice?

You can unlock between 80% to 100% of your invoice value, depending on your Invoice Factoring provider. Most providers also place a ceiling on how much can be advanced, which differs between providers as well. Small business-friendly providers place this limit at around £250,000 while large providers set their limits up to £5 million

Am I eligible for Invoice Factoring?

Invoice Factoring providers primarily look at the following factors:

  • Business and revenue history

  • Customer creditworthiness

  • Any open bankruptcies or similar financial concern

The specific requirements depend on the provider. In general, your customer’s creditworthiness matters a lot more than your own. This is because they are the ones who need to settle the debt, not you

How much does Invoice Factoring cost?

The total cost of Invoice Factoring is based around 3 things:

Discount or Factoring rate

  • Length of Invoice

  • Other Fees

The discount rate is a fixed percentage usually ranging from 0.2% to 5% of your invoice value. This is charged either weekly or monthly, depending on your provider. Which brings us to why the length of your invoice matters. The longer your invoice, the more time it takes for your customer to pay and the higher the total cost of your Invoice Factoring

Additionally, some providers charge other fees such as origination, service, and termination fees.

When do I receive the cash?

Most providers advance you the cash within the same day you submit your invoice. This is one reason why Invoice Factoring is so widely used, as you receive an instant cash injection into your business.

Are there contracts?

In general, providers offer both contract and ‘pay-as-you-go’ options. You should expect to face slightly higher fees for the additional flexibility of the no-contract option.

Do I need a good credit score?

Not necessarily. The creditworthiness of your customers is more important to Invoice Factoring providers than your own since your customers owe the balance. However, you should expect there to be a minimum requirement for your annual turnover or revenue.

What happens once I sell my invoice?

Your Invoice Factoring provider transfers the agreed-upon cash advance to your account, typically between 80% to 100% of your invoice value. You can begin using this money to run your business. Once your customer settles the invoice with the provider, they forward you the rest of the invoice value minus any fees.

What if a customer does not settle the invoice?

This depends on whether you choose Recourse or Non-Recourse Factoring. Recourse Factoring means that you bear the risk of any unpaid invoices. While Non-Recourse Factoring provides Bad Debt Protection, which means the provider absorbs all of the risks.

How do I decide between Invoice Factoring providers?

There are multiple factors you need to consider when determining which provider is the best fit for your business. This includes:

  • Factoring rates

  • Additional fees

  • Contracts

  • Bad Debt Protection

  • Customer Service

  • Reputation

  • Experience

There is no one-size-fits-all between Invoice Factoring providers and businesses.

How do I find the best Invoice Factoring option?

You could spend endless hours looking for the best Invoice Factoring option for your business or… Why not make your life easier by using our free comparison tool?

At FinanceCompared, we stay on top of all the latest Invoice Factoring news to always provide you with the best options for your business. By entering a few pieces of information, you’ll receive an instant quote comparison of the most suitable Invoice Factoring options.

So give our quote comparison a try, receive your free no-obligation quote today, and let us know how it goes!
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