A visual guide on how factoring works

Alternative approaches to SME funding such as invoice finance (factoring and invoice discounting) are now offered by the top banks and independent lenders across the UK.

Every entrepreneur is aware of the benefits an overdraft or a bank loan can bring to their business. However, banks are increasingly reluctant to offer such facilities to businesses, as default rates and credit risks are on the rise.

Alternative approaches to SME funding such as invoice finance (factoring and invoice discounting) are now offered by the top banks and independent lenders across the UK.

Regardless of whether you wish to grow your business or boost sales, trading on credit terms is necessary but can place a strain on your cashflow and limit your ability to expand. If you’re in this position, then a factoring facility is an ideal solution.

Factoring is a form of invoice finance that permits you to raise up to 90% of the funds tied up in your sales ledger, usually within 24 hours of raising an invoice. The remainder invoice value balance is paid to you, upon settlement of the customer’s bill.

Factoring is widely embraced as the alternative to the bank overdraft as they both offer short-term funding. However, the profile of factoring as a facility, including the benefits and the providers is not raised well enough to capture the SME market just yet.

In principle, only about 42,000 businesses currently use invoice finance to finance their business. With over 4.8 million small businesses in the UK, 21% (1million) don’t know they can benefit from an invoice finance facility.

Touch Financial have come up with a new take on how to promote factoring services. They are the UK’s largest invoice finance intermediary, specialising in commercial financing solutions to businesses across the UK. Their growth within the industry has seen them adopt new approaches to educate businesses on how invoice finance can fuel growth into their business. This is by means of a factoring infographic, clearly explaining how the facility works in a practical manner.

You can see the infographic here: Invoice Factoring Infographic

The benefits of invoice finance over the overdraft

Here are some key points to bear in mind when applying for either factoring or a bank overdraft:

  • Flexibility: With factoring, as your sales rises, so the amount you can release also rises. A factoring facility grows in line with your business. A bank overdraft tends to be a fixed limit irrespective of whether your business grows or not. Renegotiating a higher limit can result in higher costs and may not even be possible.
  • Can my business qualify? Because factoring is simply a cash advance against monies already earned, most businesses – loss-making to highly solvent, start-ups to multi-national enterprises – can qualify, as long as they trade B2B on credit terms. Banks often demand for evidence of successful trading before offering you an overdraft. As such, overdrafts are readily available to established businesses with a good credit history.

Not being able to understand the costs when it comes to a factoring facility is the main barrier faced by invoice finance providers. Depending on your business circumstance, a factoring arrangement can release up to 4X an overdraft limit.

See also: What is invoice finance and who are the top 5 lenders?

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for GrowthBusiness.co.uk from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.