Tag Archives: factoring

Using Factoring To Raise Money For Your Business (Guest Post)

FactoringIt 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.

The Solution

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.

This article was written by Kedisha from Touch Financial, the factoring specialists.

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Business Start-Up Myth – It’s hard to get a bank loan

business-start-up-financeAnother business myth that often rears his head is to do with business start-up finance. People say it’s hard to get a bank loan to start a business. This myth is reinforced by recent research carried out by the IoD which suggests that 60% of directors have been rejected by banks when seeking finance yet clearly this is not always the case. Many people rejected by bank lenders have no form of guarantee or little equity. Shoddy business plans might well be to blame also.

With the current state of the economic climate, the new coalition Government are keen to encourage the banking sector to lend more freely to SMEs and business start-ups. Pressure is mounting to give financial support to the small businesses in the UK which are the life blood of the economy.

Bank loans for business start-ups

Getting a bank loan for a new business start-up might not be a difficult as you imagine. With a well drawn up business plan and the proper company documents, as well as some form of equity, banks will be far more willing to lend to new businesses. More often than not, new limited companies find it far easier to gain finance than any other form of business as lenders are far more willing to invest in this legal structure. Consider carrying out a company formation to start your new business to make the most of this and other advantages of limited companies.

Finance alternatives

New businesses should bear in mind that bank loans are not the only avenue for business finance. There are plenty of alternatives, some easier and some harder ways to acquire finance, each with its own merits. Take a look at our previous article “Top 10 ways to fund your new business” for more information. Government grants, factoring and regional growth funds are just a few examples. If you are willing to let others get involved in your new business, you may also want to think about venture capitalists and business angels.

Late Payment of Commercial Debts

credit cardsIn my previous article (Late Paying Businesses and The Solution – Factoring) I discussed the problems faced by small businesses and newly formed companies when dealing with late paying businesses they interact with. As mentioned, one of the solutions is the use of factoring, however there are other alternatives.

Under the Late Payment of Commercial Debts (Interest) Act 1998, the government gave small businesses the power to charge interest on any late payments. Business Link supplies a detailed user’s guide to late payment legislation which covers the workings of the legislation and an SMEs rights under the law.

The essence of the legislation is straightforward. Businesses may charge interest on late payments and make this part of their payment terms as part of the statutory rights. This hopefully acts as a deterrent to (potentially) late paying companies they are doing businesses with. The danger (and potential pitfall) of this practice is the risk of losing the customer when attempting to charge the interest and in future they take their business elsewhere.

The government suggests using specific terms within the contract to make the interest charges clear before doing business. This will in theory avoid such disputes, but commonly larger companies dictate the way the transaction operates and small businesses trying to survive have to bow to their will. It’s still always good to know your rights.

Late Paying Businesses and The Solution – Factoring

Research carried out by the Forum of Private Business has shown that small firms are currently feeling the pressure as more and more other businesses are late with their payments. Larger companies in particular are guilty of making struggling SMEs wait for payment of their invoices.

Dell is cited as an example after increasing its payment days from 50 to 65, potentially leaving their suppliers waiting another 15 days for payment of their bills. These sorts of delayed payments can have potentially serious effects on small and growing businesses, which may well be struggling to survive in their first few years. Late payment necessarily leads to less available finance for the running of the business, investing in future plans or any other business activities.

With the current state of the economy, life or death of a business may well hang in the balance. Late payments could be the tipping point.

There are solutions out there. As I previously discussed in another article, Factoring is an option available to those companies who need finance quickly.

“(Factoring) is a financial transaction where a company sells its invoices to another business at a discount. This other business (a factoring company) then seeks payment of these invoices from the debtor. Factoring allows swift acquisition of finance which can be used to fund business growth. The obvious downside being the loss of value of the initial invoice.”

Factoring allows the business to quickly recover its invoice payment and thus the finance it needs in the short term. It may be a necessary alternative to waiting for payment or trying to counter the delayed payment by doing the same and risking damaging the businesses reputation.

During the factoring process, the rights associated with the invoice are passed to the factoring company, as well as any risks that go with it.

Factoring isn’t always ideal, but it may be preferable to the alternative. The factoring company may only be willing to take on the debt if the debtor is sufficiently credit worthy. This clearly wouldn’t be an issue when dealing with a large company such as Dell, but for small business activities it might be a consideration.

At The Company Warehouse, we know the importance of finance for small business, which is why we are expanding our services to include finance guidance and use of a financial database to help find the money you need to get your business started and keep it running. Register for access to My Company Warehouse to gain access to this and other business services.

Reference – Computer giant Dell entered into late payment Hall of Shame