Invoice factoring, sometimes known as ‘accounts receivable financing’, is an option that allows businesses to receive a cash advance against invoices owed to it by its customers. A factoring company purchases the outstanding debt, offering the business a percentage of the total in cash.

What Costs are Involved?

Any invoice factoring company UK based at least, will usually charge a processing fee and/or a percentage based on the credit standing of the business’ clients or how long it takes to collect the invoices. Depending on the contract with the factoring company, either all of the business’ invoices may be factored or only a few. The contract can be long or short-term, depending on the needs of the business and the factoring company’s policies.

How is Factoring Different From a Bank Loan?

Banks normally loan money based on concrete, physical resources, such as buildings and vehicles. A bank may also be willing to extend a line of credit to a well-established business based on past sales records and the viability of its business plan. A factoring company is solely interested in purchasing the debt owed to the business and therefore makes the offer based on the credit worthiness of the its clients.

What Makes a Business a Good Candidate for Factoring?

A business might consider factoring as an option if:

Goods and services are offered to clients on credit.

Clients are other businesses. Factoring is not normally offered to retail businesses that deal with individual customers.

Cashflow is an issue, due to the period of credit allowed between the services or goods being supplied and payment received.

The business could benefit from assistance collecting overdue payments.

Cash needed for expansion, expenses or supplies is tied up in outstanding accounts payable.