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Many businesses face problems when it comes to their cashflow, as waiting for invoices to be paid can leave them without sufficient finance to cover running costs, pay staff and invest in their growth.

That is why invoice factoring services can be of help, relieving companies of financial pressure while waiting to receive payments.

What is invoice factoring?

To establish whether invoice factoring could be of assistance to your business, it is important to fully understand it. Invoice factoring allows businesses to receive advances from service providers on the money they are owed from customers, enabling them to free up their capital

This is how they work:

– The company sends the invoice details over to the invoice factoring provider.

– These then release a proportion of the invoice to the business, typically within a couple of days.

– The service provider collects the money owed from the debtor.

– Finally, the balance is given to the company with the service fee and any interest payments subtracted.

Is invoice discounting different to invoice factoring?

Invoice discounting is very similar, but differs in that the third party agrees to buy your unpaid invoices for a fee, but you collect the funds from the debtor yourself. The advantage of invoice discounting over factoring is your customers or clients will not find out you are borrowing money to cover their invoices, and you can retain full management of your accounts.

However, many companies prefer invoice factoring, as the financing providers check the credit rating of customers to ascertain whether they are likely to pay on time. This could help significantly in the future by revealing clients who are unable to afford your goods or services.

Factoring also enables you to spend more time building your business, instead of chasing unpaid invoices.

Things to consider before borrowing against your invoices

Before you sign up to an invoice factoring or discounting service, it is wise to weigh up your options. They are particularly effective for small businesses that cannot cover their expenses without steady payments, and they are ideal for those unable to access traditional bank loans since financing became more restricted.

However, you need to consider the impact it might have on your business in the future. If you do not want your clients or customers to know you have to borrow to stay afloat, you might want to opt for invoice discounting instead.

It is also worth bearing in mind the fees you have to pay a third party to handle your invoices, as this will directly eat into your profits, hitting those who most need financial support the hardest. Fees vary between 0.5% and 5% on outstanding monies, while an additional service charge of around 0.5% of your annual turnover is required as well.

Therefore, if you are owed £10,000, you might have to pay as much as £500 just to chase up the debt owed, before paying a service cost. However, for some businesses who prefer to deal with their business rather than late payers, this is a price worth paying.

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