INVOICE FINANCE

Thursday, July 25, 2019

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Small Business Invoice Factoring

How to choose an invoice factoring company for your small business
If you are looking for ways to improve cash flow or increase funds for your small business, consider invoice factoring. Discover how it could help you

Small Business Invoice Factoring - Choosing an invoice factoring company that’s right for you can seem like a daunting prospect for many small business owners. To make this easier we have created the ultimate guide covering everything from how small business factoring works to the costs involved.



At this stage, it’s likely you have some queries about invoice factoring. In this article, we’ll provide you with the information you need to decide if invoice factoring could work for your small business.

What is invoice factoring for small businesses?
Invoice factoring is a way for small businesses to raise capital and improve cash flow. You sell your unpaid bills, or invoices, to an invoice factoring company in return for a cash advance.

The cash advance usually equates to around 80% of the invoice value which you receive within 24-48 hours of factoring your invoice. The remaining value of your invoice is paid back to you minus the factoring fees once it has been collected.

Small Business Invoice Factoring - A good way for entrepreneurs to inject cash into their business, options for small business factoring depend on a number of factors but also bring advantages and disadvantages. Weighing these up in the context of what options are available to you is important when choosing a factoring company.

Find out more on our what is invoice factoring page now.

How does small business factoring work?
The nature of the invoice factoring arrangement will depend on your particular invoices. However, there are some basic concepts to understand.

Factoring companies will look at certain variables which will allow them to work out how they will determine the risk of taking on your unpaid invoices.

These variables include:

The invoices you wish to hand over responsibility for
The time scales, size, and likelihood of receiving timely payment
Your standing, longevity, and reputation
Once this process is complete, which is usually quite fast, they will come back to you with their factoring agreement and terms.

Typically, the next steps will follow the below process:

You sell your invoice(s) to the factoring company
You are then advanced the majority of the invoice amount, usually around 80%
Once the invoice is paid, the outstanding balance (the remaining 20%) is forwarded to you, less the factoring fees

Factoring companies for small businesses
Once you have decided that invoice factoring is the best option for your business you need to start considering which invoice factoring company in the UK will suit your needs most appropriately.

In addition to their fees, you will also need to compare different companies based on their application process, how they evaluate your business, their reputation, and how they will safeguard your reputation with customers and clients.

For some small business factoring companies, you will need to have been in business for a certain amount of time, or to have a minimum turnover. You can self-select some companies based on these factors alone.

From here you will need to consider how much of the unpaid invoices that the factoring company will advance you (usually 80%) and how quickly you can get the funds (usually between 24-48 hours).

To help you consider which factoring company is best suited to you, we have reviewed some of the top UK small business invoice factoring companies and brokers. The table below contains a quick side-by-side comparison, with more information about each company included further down.

What to look for in an invoice factoring company
After understanding what invoice factoring is and comparing companies, it’s worthwhile to consider some other aspects to help you find the best option for your small business. Additional features to consider include:

Small Business Invoice Factoring - Financial regulation: Is the company recognised by, or a member of, a trusted financial body or organisation, such as the Financial Conduct Authority (FCA) or UK Finance, if applicable
Industry recognition: Look at reviews from other small business owners who have used the company’s services; has the company been nominated for, or won, any awards?
Specialism: Think about choosing an invoice factoring company that offers expertise in your sector to better understand your business needs
Industry-specific invoice factoring
While some invoice factoring companies will accept small businesses from a range of sectors, others offer specialised services for specific industries. Examples of expertise and the industry-specific issues focused on include:

Construction

Time frame: Offer understanding of the unique timeframes that apply in the industry
Materials: Construction-specific factoring can help to make necessary materials available to you as soon as you need them
Subcontractors: Specialist invoice factoring can assist in any payment gaps between contractors and subcontractors
Logistics

Flexibility: If you require funds for a one-off hire or an ongoing job, industry-specific invoice factoring could be useful
Repairs: Ensure a smooth workflow by using funds for vehicle maintenance when you need it
Growth: Expand upon your logistics business offering to meet demands of the market with relevant knowledge
Recruitment

Balance: Invoice factoring specific to recruitment can help with ensuring balance between receiving a brief and placing candidates
Flow: Maintain continuity throughout the recruitment process
Payments: Manage the difference between weekly and monthly payment cycles
Will small business factoring help my cash flow?
Yes. Small business factoring will help you to improve your cash flow via cash advances from your unpaid invoices.

This is a major benefit of invoice factoring and is one of the main reasons why factoring is so popular among small businesses.

Small business factoring costs
The cost of invoice factoring is important to consider. Costs are variable because they depend on a number of criteria. However, you will usually find that they are negotiable.

The main cost you need to consider is the discount (factor) rate. This is the fee that the factoring company charge you, usually on a weekly or monthly basis, for taking on the risk of the unpaid invoices and advancing the cash to you. The factoring charges are calculated on a percentage basis of the invoice value which typically range between 0.5 – 5%.

However, there are ways that you can minimise factoring fees. For example, with lower risk and greater volumes you can expect the factoring charges to lower. On the other hand, with higher risk and lower volumes you can expect higher invoice factoring costs.

In addition to the discount (factor) fee there are other factoring costs which you should take into consideration. These will usually fall into either of the following two categories:

Administrative charges
Penalty fees

Benefits and challenges of factoring for small businesses
There are a range of both advantages and disadvantages to factoring. Before going ahead with an invoice factoring company, you need to be sure that the benefits to your business are greater than the potential downsides.

On the plus side, factoring can:

Increase your cash flow quickly, without waiting for customers to pay
Reduce administrative pressures on your business due to processing invoices
Help you grow by taking advantage of opportunities as they come, such as a new client or project
Enable you to make urgent purchases
Reduce the time involved in the cash flow cycle, which can be limiting to small businesses who are unable to wait long periods for payment
Offer some protection against non- or delayed payment, as the invoice becomes the factoring company’s responsibility
Remove responsibility, cost and stress of debt collection
Give you assurance over invoice payment
The drawbacks of factoring will depend on the nature of your business, and your outstanding invoices. However, disadvantages of small business factoring include:

Some customers may not like that you are using an invoice factoring company, which could potentially impact your business reputation. However, some invoice factoring companies will work with you to find the best way of collecting payments to maintain good relations with your clients
Some agreements can leave you liable if the customer doesn’t pay
Slightly reduced revenue because of the factoring fees. However, this can be outweighed by the advantages of immediate cash flow
Is invoice factoring right for my business?
Invoice factoring isn’t right for every small business, but for others it can be a lifeline and a way of maximising opportunity and growth.

Small Business Invoice Factoring - You need a flexible and fast source of cash and do not want the hassle of the administration work associated with the processing and collecting of unpaid invoices, invoice factoring is an ideal solution. Although there are other ways you can raise cash, these tend to be slower to access or not available to small businesses.


For example, small business loans are an alternative to small business factoring but they can be a much slower process. You may have also already ‘maxed out’ on bank or building society lending. Additionally, overdrafts do not tend to have the capacity that you require or favourable rates.

If you have reliable customers that pay their invoices by the end of the invoice period – let’s say 60 days – but your business struggles to keep up with other client requests or orders because you lack the cash flow to maintain the smooth operation of your business, then invoice factoring can provide a helping hand. Ultimately, invoice factoring can help you to grow, solve cash flow issues and take advantage of new business opportunities.

You have unreliable clients with poor credit history who consistently fail to pay the invoice amount by the due date then invoice factoring may not be the best option for you as you could face late payment fees from the invoice factoring company.

In addition, if you are raising international invoices or collecting funds in multiple currencies, then invoice factoring is less suitable. If this applies to your small business, export finance is worth considering.

Compare small business invoice factoring quotes
The information on this page should help you to understand what kind of things you need to look for when considering small business invoice factoring. For more detailed information though, you can speak to suppliers today – we can help with this process.

Small Business Invoice Factoring - To compare quotes from up to four invoice factoring companies, simply complete the form at the top of this page. The process is free, quick and easy, and it could help your business to save time and money.
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Invoice Scanning

What is Invoice Scanning?
Invoice scanning is the process where supplier invoices in different formats are scanned in order to digitize and capture the invoice information. Companies can manage invoice scanning internally using a scanner and a data capture solution, or outsource invoice scanning to an external party.
Invoice scanning and data capture are required in order to work with AP invoice automation, where supplier invoices are processed in a digital workflow that is fully or partially automated. Preferably, you would select an invoice scanning software that is included or integrated in your AP automation solution so that the entire invoice process is managed in a streamlined workflow.

Quick and reliable Invoice Scanning
Are you ready to digitize your accounts payable? MediusFlow can help you accelerate and automate your entire accounts payable process.



Manual sorting and archiving of documents could be a slow and prone to human error process, which sometimes leads to time delays and affects bottom lines. SmartSoft Invoice Scanning avoids such hurdles and optimizes the way you handle and store invoices, thus freeing time for other important tasks.

The Process Invoice Scanning
1. Scanning and Importing Invoices
Whether you receive invoices as paper documents, fax, PDFs or image files, SmartSoft Invoices handles all of them. You can scan paper invoices directly to the software or import PDF and image files.


2. Data Capture Invoice Scanning
Invoice Scanning reads two key fields from the document such as Vendor and Invoice Number, based on template recognition. Defining a new invoice template is easy - the software locates the text regions and identifies them. So, for each new invoice, coming from the same vendor from now on, the software extracts the data automatically.

3. Data Export Invoice Scanning
Once processed, invoice documents are saved as searchable PDF in a predefined output folder, sorted by the data extracted from the key fields.


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Invoice Funding

Funding Invoice – The simplest way to release the cash that’s tied up in your outstanding invoices. Thousands of businesses across use invoice finance to maintain a healthy cash position. Providing a cash advance on your unpaid invoices will help you take back control of your cash flow so that you can get on with growing your business



INVOICE FINANCE FOR YOUR BUSINESS

Funding Invoice offers a new take on an old method of funding your business.

Invoice finance allows you to release cash that is currently locked up in outstanding invoices. There are several SMEs and businesses that rely on their invoices to maintain a healthy cash flow, whether they are providing orders, consumer goods or offering a professional service. So rather than wait 30, 60 or 90 days for an invoice to be paid, Funding Invoice can provide up to 80% of the invoice value upfront within 48 hours of being approved.


Invoice Funding - By having access to your funds tied up in invoices, known as accounts receivables, you can use this finance effectively to maintain a healthy cash flow or improve working capital for things like staff, inventory and servicing new orders.

Invoice finance as an asset based loan has been around for several years and has sometimes been associated with only being used by struggling businesses. However, this has changed in recent years where businesses have started to really unlock the power of invoice finance to fund their growth and take their business to the next level.

Invoice Funding - You are not required to sell your entire ledger of invoices and you may choose to use pay-as-you-go invoice finance where you provide an invoice as and when you see fit.
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Invoice Financing for Small Business

Invoice Financing for Small Business - Small businesses, especially those who have not been existence for very long, will often find it difficult to secure a loan. Banks are often hesitant to lend money to businesses that don’t have a lot of income and assets. They also want proof of the viability of a business, and thus require that most operations, especially small ones, are in business for a certain amount of time before they are willing to hand over any money. Because of this, a small business often has a few cash-generating options when needs arise. One option available, but often overlooked, is invoice factoring. Invoice factoring is an excellent way for a small business to obtain cash.



Factoring invoices are advantageous for several reasons. It allows a company to raise money without acquiring new debt. While debt is sometimes necessary, most businesses would prefer to raise cash without borrowing money. Debt is risky, and when it cannot be paid back, assets can be repossessed. If the debt is large enough, it may even force a company out of business.

Invoice Financing for Small Business - Factoring doesn’t pose the same problems. Those invoices secure the money paid to the company selling their invoices. The work often has already been done, and the business is only waiting to receive payment.

Factoring invoices is also an excellent option because it is a way for a small business to get the money very quickly. More often than not, when a company is in a cash crunch, they don’t have much time to figure things out. Their employees have to be compensated, there are supplies to buy, and rent to be paid. These things often can’t wait, at least not for very long. Therefore, the time factor is critical. A small business will need to secure funds as soon as possible. Factoring allows them to do that. The company’s first experience with a factor may require they wait 4-7 days to get paid. However, from then on it is likely they will receive money in as little as 24 hours.

Invoice Financing for Small Business - The factoring process is pretty simple after all of the details have been arranged. A company will sell their invoices to a factor of up to 90% of its value.  For example, a $100,000 invoice may sell for $90,000. The company can use this working capital; however, they wish to use it. After they have paid for the invoices, the factor will collect on the invoices. The original terms of the invoices apply. After they have collected them, the money is returned to the company they purchased them from, minus the factor’s fee.  It’s as simple as that.
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Invoice Financing

What is Invoice Financing?
Invoice financing is a way for businesses to borrow money against the amounts due from customers. Invoice financing helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their balances in full. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money. Invoice financing can solve problems associated with customers taking a long time to pay as well as difficulties obtaining other types of business credit.

Invoice financing is also known as "accounts receivable financing" or simply "receivables financing."




Understanding Invoice Financing
When businesses sell goods or services to large customers, such as wholesalers or retailers, they usually do so on credit. This means that the customer does not have to pay immediately for the goods that it purchases. The purchasing company is given an invoice that has the total amount due and the bill's due date. However, offering credit to clients ties up funds that a business might otherwise use to invest or grow its operations. To finance slow-paying accounts receivable or to meet short-term liquidity, businesses may opt to finance their invoices.

Invoice financing is a form of short-term borrowing that is extended by a lender to its business customers based on unpaid invoices. Through invoice factoring, a company sells its accounts receivable to improve its working capital, which would provide the business with immediate funds that can be used to pay for company expenses.

KEY TAKEAWAYS
Invoice financing allows a business to use its unpaid invoices as collateral for financing.
A company may use invoice financing to improve cash flow for operational needs or speed up expansion and investment plans.
Invoice financing can be structured so that the business' customer is unaware that their invoice has been financed or it can be explicitly managed by the lender.
Invoice Financing From the Lender's Perspective
Invoice financing benefits lenders because, unlike extending a line of credit, which may be unsecured and leave little recourse if the business does not repay what it borrows, invoices act as collateral for invoice financing. The lender also limits its risk by not advancing 100% of the invoice amount to the borrowing business. Invoice financing does not eliminate all risk, though, since the customer might never pay the invoice. This would result in a difficult and expensive collections process involving both the bank and the business doing invoice financing with the bank.

How Invoice Financing is Structured
Invoice financing can be structured in a number of ways, most commonly via factoring or discounting. With invoice factoring, the company sells its outstanding invoices to a lender, who might pay the company 70% to 85% up front of what the invoices are ultimately worth. Assuming the lender receives full payment for the invoices, it will then remit the remaining 15% to 30% of the invoice amounts to the business, and the business will pay interest and/or fees for the service. Since the lender collects payments from the customers, the customers will be aware of this arrangement, which might reflect poorly on the business.

Invoice Financing - As an alternative, a business could use invoice discounting, which is similar to invoice factoring except that the business, not the lender, collects payments from customers, so customers are not aware of the arrangement. With invoice discounting, the lender will advance the business up to 95% of the invoice amount. When clients pay their invoices, the business repays the lender, minus a fee or interest.
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