Insolvency body, R3, have recently revealed that as many as 1 in 5 corporate insolvencies in the last year were brought about as a result of a late payment or insolvency of another company.

Many businesses are experiencing late payments from businesses or individuals they supply to, but for some small and medium-sized enterprises (SMEs) this can significantly hurt them financially.

If you are running a business experiencing these difficulties then this is where factoring could help you as a short term solution to cash flow struggles brought about by late payments. Factoring can benefit your business if you find yourself frequently short of cash or unable to provide/control credit given to your customers.

How factoring works

Lenders provide factoring to businesses to generate quick funding which is secured against the book debts (value of outstanding invoices) of that business. It is therefore the perfect solution for businesses which provide to slow paying customers to help improve their cash-flow position and carry on trading without worrying about unpaid invoices.

Where factoring differs from other business loans is that cash will only be provided from factoring companies for a percentage value of outstanding invoices.

The process

If your business is struggling or unable to manage money as efficiently as it did, due to late payments by your customers, factoring may be the answer.

Here is how it will work:

  • Once approved your lender will take over the responsibility for the collection of the debt until payment is received.
  • You issue an invoice to your customer instructing them to make payment to the factoring company.
  • The lender will release a pre-agreed percentage of the invoice value to you, usually within 24 hours.
  • Your business’ customer will pay the invoice in full directly to your lender. You will not receive the money from your customer for the value of the invoice; this will be stated in the invoice sent out to the customer.
  • You will then receive the remaining value of the invoice from your factoring company, minus their fees.
    Factoring late payments content

How can this benefit your business?

If you are a B2B business, factoring can be extremely beneficial for you for a number of reasons.

These include:

  • Providing an instant cash injection.
  • No longer having to chase the debt yourself – the responsibility for collecting the debt will pass over to your lender.
  • Helping you to pay day to day bills – this ensures you can keep down business costs and avoid cash flow problems.
  • Factoring can help you to expand your business.
  • It is easy to set up – your business’ finances are not examined in as much detail as they would be for a bank loan. This is because factoring companies are more interested in your customer base. As a result, there is a better chance of approval.
  • Money from your lender will usually be paid within 24 hours – up to the pre-agreed percentage of the invoice.
  • The facility grows with your business – the more invoices you issue, the more money available to you from your factoring company.
  • No need to negotiate as you grow – the facility grows with you.
  • They are a good option for start-up businesses – some factoring companies will take a chance on a start-up in order to help them grow and develop.

There are many benefits to invoice finance for your business, even if you are a start-up business and are more likely to be significantly affected by late payments from customers.