Many businesses find it difficult to improve their cash flow and raise funding. Banks often have strict lending criteria, and if you don’t meet these you may feel that you have few options left. Some business owners consider taking out a personal loan to fund their business, or decide to sell assets to raise cash. You can have a business that’s doing well in every way, but when you need a quick injection of cash the banks are unable to help.
If you’ve been refused a business loan, or need to raise cash quickly, invoice factoring might be for you. This isn’t a last resort – in fact, factoring is increasingly popular in sectors such as start-up business, when you don’t have a long trading history but do have healthy figures. It’s also a great solution for those who need cash quickly – factoring can release cash in as little as 24 hours whereas bank loans take longer to arrange.
How does factoring work? Factoring lets you raise cash against your outstanding invoices, so as soon as you raise an invoice you can release up to 90% of its value. This means that you don’t have to wait for your customer to pay – the factor pays you directly. When the customer settles the invoice, this repays the factor and they give you the remaining balance minus their fee. The factor normally collects directly from your customer, but if you would prefer the service to remain confidential you can use what’s called “invoice discounting” where you still collect your own payments.
Factoring has distinct advantages over normal loans. As mentioned above, it’s a quick way to get cash. Another advantage is that your admin could be reduced – the factoring company will manage your sales ledger and chase payments on your behalf. Of course, this means that they communicate directly with your clients, but if a lot of your time was taken up with this before it’s one less thing to worry about.
If factoring sounds like a good idea, you should talk to a specialist broker to find the right factoring company for you. Some are independent, some are funded by banks, and some specialise in different sectors. As a general rule, to be eligible for factoring you need to sell to other businesses, raise a good number of high-value invoices (so it’s worth the factor’s while to work with you), and your customers must pass the usual credit checks to ensure they’re likely to pay on time and in full. If you meet these requirements and traditional finance isn’t for you, then factoring is worth a try.
This is a guest post by Kedisha from Touch Financial, the factoring specialists.
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