It can often be difficult for new or start-up businesses to raise finances. Lenders are wary of providing financial support to companies that don’t have a proven track record, whose business models depend on just a few large accounts, or who require investment in order to grow and increase their profit margin.
Another problem that new businesses face is the day-to-day admin side of things. Even if you’re an expert in your field you may not be experienced in setting up invoicing and PAYE – these back office processes are necessary for your business but can prove a stumbling block if you’ve never dealt with them before.
One solution to both of these issues comes in the form of invoice factoring, also known as invoice financing. With factoring, you raise cash against your invoices. Normally, when you raise an invoice you’d have to wait 30, 60 or even 90 days for it to be paid. With factoring, you can borrow up to 90% of the invoice’s value in as little as 24 hours. This improves your cash flow, giving you an instant injection of capital when you need it most.
The factor doesn’t just lend you money, they can help out with your business admin too. It is common for factor to take over their client’s sales ledgers, meaning that they control your payment collection. They will contact your clients directly for payment, so you may not need a dedicated accounts department to handle this for you.
Some companies prefer not to disclose that they use a factoring service, in which case invoice discounting is also available. This works on the same principle as invoice factoring, only you retain full control of your sales ledger and take care of your own payment collection.
In both cases, once the factor has been paid in full this means your loan has been paid off without you having to hand back any cash.
Where’s the catch?
Of course, because you’re borrowing money there is a fee to pay. Factors will charge a percentage of the invoice value, so you don’t receive the full amount of your invoice. This may decrease your profit margin, but it’s often a small price to pay to improve your cash flow and get access to expert business advice. You don’t have to pay a fee before you’re lent any cash – the money you receive will be the invoice amount, less the factor’s fee.
Am I Eligible?
Factors generally require that you are a low-risk investment with a good trading history. This can mean that you don’t rely on one or two big clients for your business, but spread the risk among several. You may also need to have reliable clients who tend to pay their invoices on time rather than disputing them.
Some factoring companies actually specialise in lending to start-ups, or businesses that use unusual payment and invoicing periods such as recruitment companies. To find the best factoring company for you, get in touch with a factoring broker. They have relationships with both banks and independent lenders and will be able to advise you further.