Is Factoring right for your business?

In the business-to-business world, there are specific sectors where working capital is the lifeblood of day-to-day operations and continues to be the most frequent villain of hindering a company’s growth and ability to scale.

Late payment of outstanding invoices is a common problem in the business-to-business sector, and when it occurs regularly it can cause an imbalance in a company’s cash flow.

What is Invoice Factoring?

Invoice factoring provides short-term capital in exchange for selling and assigning invoices to a factoring company (referred to as a factor). The factor advances you 80% of your invoice value. Once the invoice is paid, the factor pays the remaining 20% (minus fees). Invoice factoring is generally available to businesses that do a lot of business-to-business (B2B) or business-to-government (B2G) invoicing.

Although both terms are similar in the sense that the end result is to release cash flow, small business invoice factoring is not the same thing as invoice financing (or accounts receivable financing), although the terms are both used mutually. Invoice financing is more streamlined, easier to use, and doesn’t require the assignment of invoices like factoring does. Additionally, invoice factoring companies such as Populous World can work with business-to-customer (B2C) invoices.

Invoice Factoring is typically a solution for short-term cash flow problems. It is frequently used as a way for businesses to simplify their cash flow conversion. Factoring financing is most often not used for big capital investments.

Invoice factoring as a flexible funding solution

This type of finance can be perceived as invoice funding, which uses invoices as a way for businesses to unlock cash tied up in outstanding invoices and therefore speeding up cash flow. This is done by selling invoices to a third party who will advance some of the funds the invoice is worth upfront, for a cut of the invoice.

Factoring includes no additional debt incurred when using the service. While there is a fixed service fee, the interest is only charged on advances that remain unfulfilled by customers. Therefore each time a customer pays their bill, the debt is repaid. Because of this, the amount you can borrow grows along with your business.

Invoice factoring companies typically offer their services to companies with an annual turnover of at least £50,000, although some will consider start-ups and smaller businesses. A business can typically borrow up to 90% of the value of their invoices, depending on the factoring facility.

Several different types of providers offer factoring or invoice discounting facilities, including banks, financial institutions, independent providers and online newcomers such as Populous World, which auctions invoices to global investors. The auction process provides invoice sellers with a range of competitive offers at a discount rate and bids around the globe from individual investors.

The Populous World auction model appeals to a multitude of SME’s as it means they can select which customer invoices they would raise finance on, and would only incur fees when they need to use it.

Invoice discounting for efficient working capital management

To effectively manage working capital forecasts and increase business productivity, businesses can look at invoice discounting as a form of managing extended payment terms and freeing up cash locked into outstanding invoices.

Populous World’s invoice discounting service, where the process implements an invoice bidding mechanism. Invoice buyers (investors) will bid to purchase the invoice at their lowest acceptable interest rate, and the bidding process will result in the invoice sellers (in this case, the manufacturer) receiving the best interest rates. The bidding process will only take 24 hours before the funds will be released to the invoice seller, which is similar to the industry practice. This enables you to receive cash faster than the invoice payment terms, though it will be at a discount rate. There are now many innovative non-bank platforms offering this service which may be appealing to small businesses.

How does Invoice Factoring work?

On a day-to-day basis, businesses send out invoices as orders are fulfilled. The pre-agreed percentage of each invoice is deposited to the business’s bank account once a copy of the invoice has been received and validated by the lender. The released working capital can then be used to pay bills, repay debt, improve cash flow or as part of a long-term plan for a growth spurt. To put how invoice factoring works in simpler terms, the team at Populous World have devised simple steps to break down the process:

  1. Invoice your clients/customers on transactions as usual.
  2. Pass the invoice details on to the factoring provider.
  3. The factoring provider will pay you an agreed percentage within only a few hours, taking up to 24 hours
  4. Depending on the agreement (factoring or invoice discounting), you will chase down the payment from the customer as usual if that is necessary, or your chosen provider will do that for you and manage your credit control.
  5. You receive the remaining balance of the invoice amount once the invoice is paid, less any charges.

Can your business factor single invoices?

Yes. This type of financing is called selective invoice factoring, selective invoice discounting, spot factoring, or single invoice financing. This is where you can pick and choose which invoices you wish to factor by selling individually selected invoices. This gives you the flexibility to choose the specific invoices that you factor.