Invoice Factoring to Unlock Cash from Unpaid Invoices

Receive between 70 – 85% of your invoices total value upfront

Eliminate lengthy invoice payment terms and receive 24hr funding

What is invoice factoring?

Invoice factoring (also referred to as debt factoring) is a type of invoice finance that enables businesses to sell their invoices to a factoring company for a percentage of their total value. When money is lent against a business’ unpaid invoices, the majority of owed money can be received upfront, eliminating the weeks or months it would have taken to get the invoices paid.

·   The factoring company takes responsibility for chasing and collecting unpaid invoices.

·   Accounts receivable financing that best suits businesses experiencing lengthy invoice payment terms.

paid invoices

What is invoice finance?

Invoice factoring comes under the umbrella term invoice finance, which is the process of borrowing money to cover the number of unpaid invoices that clients owe your business. This funding solution, offered by invoice factoring companies such as Penny, aids businesses in maintaining cash flow, enabling suppliers and employees to be paid on time and daily business operations to continue running smoothly.

Unpaid invoices signify money that is owed to your business, invoice finance helps to cover this intermediate period which means your business won’t be out of pocket whilst waiting for payment terms to elapse. The main types of invoice finance are:

  • Invoice factoring
  • Invoice discounting
  • Single invoice / spot factoring


What types of invoice finance are there?

Besides invoice discounting, there are several invoice financing options available which are provided by invoice finance companies.

Invoice Discounting

Invoice discounting is where a business receives a percentage of an unpaid invoice in advance, rather than waiting for 30+ days for the customer to pay the invoice. An invoice discounting facility provides the business with a percentage of the unpaid invoice upfront.

Once the total invoice is paid by the customer, the lender will take a fee from the remaining invoice amount. Invoice discounting is a form of short term business finance, which is used by businesses that use customer invoicing as their primary source of revenue. Businesses will have to sell the entire amount of unpaid invoices from the sales ledger to the invoice discounting company.

Invoice financing is sometimes known as ‘accounts receivable funding’.


Selective invoice finance

With invoice discounting and factoring, the credit terms often mean that they will take care and provide money across all unpaid invoices on the sales ledger. Selective invoice financing allows businesses to pick and choose which unpaid invoices they would like to advance.


Invoice discounting vs invoice factoring

The main difference between invoice factoring and discounting is that the invoice factoring the credit company is far more involved in the credit control processes. With invoice factoring, your customers will be alerted that you are using an invoice factoring company to collect invoice payments.

Invoice discounting lets businesses have much more control over the lending business, rather than leaving it to a credit company. Therefore, the business is responsible for ensuring their clients pay on time. As the business is in control, the customer does not know that there is a third party involved, this is known as confidential invoice discounting.

They are both similar to the extent that the business will have to sell all unpaid invoices to the invoice financing companies.


Why do businesses apply for invoice financing?

Businesses apply for invoice financing because they need money promptly, but it may take 30 or 60 days for customers to pay the invoice. Invoice financing products allow businesses to access money they are owed but which are tied up in unpaid invoices.

Often the money a business receives from invoice financing can be injected back into the business to provide a boost to cash flow and working capital. Other times it may be used to pay upcoming bills, payment deadlines, or to pay staff on time.

It’s a very simple and flexible funding solution, which makes it very popular with a variety of businesses.


What types of businesses apply for invoice financing?

Any type of business can apply for invoice financing if they typically use invoices to generate revenue. The invoice finance that we can help broker can be used to help sole traders, limited companies, small businesses and new businesses that have started trading.  As long as there is a business that is looking to release revenue from unpaid invoices, invoice financing can be a useful financial product for a variety of businesses.

How does invoice factoring work?

Invoice payment terms can be lengthy, running up to 90 days. This means that businesses can often wait for up to 3 months before receiving money that they’re owed. With invoice factoring, there’s no need to wait weeks or even months for the invoices to get paid, invoice clients can be approved to borrow the invoice value within hours. Like most alternative funding products, invoice finance has been designed to be quick and simple for business owners to apply for.

·   The first stage involves collecting together your invoices and providing the details electronically to the factoring company.

·   Once your business’ documents have been analysed you will be sent an agreed percentage to lend with the terms of your invoice factoring agreement.

·   Whilst some lenders chase the invoice payments for you, others will expect you to follow-up as usual and once the invoices get paid, you will receive the balance minus any agreed fees.

invoice financing scales

Am I eligible for invoice factoring?

The eligibility criteria for this type of finance differs from a standard bank loan. Each factoring company has their own requirements, but as a general rule of thumb when selling invoices to a third party:

  • Your business should be registered in the United Kingdom
  • Have a business owner over the age of 18
  • Your customers have a solid payment history and credit record
  • A minimum volume of invoices (the minimum varies between lenders)

During the application process, it’s likely that you will also be asked for your business’ trading history, 12 months of business bank statements and related documents to give the lender a better overview of your business and whether you will be able to pay back money owed. Factoring companies will often favour businesses that are able to provide them with:

  • A detailed list of their customers and clients
  • Financial records for auditing purposes
  • The outstanding invoices that need to be funded

How do I get small business invoice factoring?

According to the Federation of Small Businesses, roughly 50,000 UK SMEs become bankrupt and go under each year as a result of late-paying clients, costing the economy a huge £2.5 billion annually. What’s more, a study of over two million invoices found that the average small business owner is owed £24,841 in late payments on any given day. To receive small business invoice factoring:

·   Step 1: Submit your application with all details of your invoices to the provider to determine whether or not your business is eligible for factor finance.

·   Step 2: The factoring company will assess your application and decide how ‘risky’ lending money to your business is. Once a decision has been reached they will provide you with a quote that will reveal how much of the value of the invoices they are willing to buy upfront.

·  Step 3: After you have agreed to the lender’s terms, you will receive the bulk of the money from the sold invoices and credit control becomes the lender’s responsibility.

·   Step 4: Once your clients’ invoices have been collected and paid, the lender will pay you the remaining balance of money, minus any fees and service charges.

invoice discounting on computer

What is a service charge?

A service fee is paid to the factoring provider for their ongoing service to your business. It covers all administration, collections and management costs and is calculated via your factorable turnover.


What is credit control?

Credit control is the name used for the service that invoice factoring providers carry out on behalf of businesses. Factoring providers employ ‘credit controllers’, who are responsible for managing the credit control of the business and chasing payment from clients.

This system is not unique to factoring companies – most businesses that trade on credit perform credit control to ensure payments are sent on time. If a customer or client misses their invoice payment deadline, credit control is responsible for sending reminders, and taking legal action when necessary to ensure all debts get paid off.

What are the benefits of invoice factoring?

Not only does invoice finance enable daily business operations to continue without strain, it can also enable planning for growth. Some of the main benefits of invoice factoring include:

·   Fast access to cash: Receive up to 85% of your invoice in just 24 hours.

·   Reduce administrative pressures: Save time spent chasing late payments.

·   Maintain customer & client relationships: By allowing an invoice provider to chase payments.

·   Improve cash flow: Reduce the time taken waiting for lengthy invoice terms and increase your working capital.

·   Fund business growth: Enabling you to take advantage of business opportunities as and when they come.

·   Bad debt protection: Eliminate risk from customer insolvency.

What invoice factoring costs can I expect?

It’s important to understand that factoring providers rarely ever charge one flat rate for their services. Rather, invoice factoring consists of different variables including invoice volume, creditworthiness, industry type and business stability. If your business is perceived as ‘low risk’ in the eyes of the factoring lender, and you have a large number of invoices that need to be factored, you can benefit from more competitive rates.

A higher volume of invoices suggests a constant stream of invoice payments to the factoring provider, making the arrangement far more cost-effective. The size of the invoice is also important, as larger single invoices incur less processing fees than multiple small invoices.

Credit checks are used by invoice factoring providers during the application process to determine your creditworthiness. If your business has a good credit score, chances are you’ll be able to benefit from lower rates.

Rates can also be industry dependent. Certain business sectors are perceived as lower risk from the onset because their payment terms are usually simple and straightforward. High risk industries are often labour intensive where the variables are more tumultuous and invoice payment dates less clear. The main invoice factoring costs are:

  • Transaction fees: These include fees charged to process the payments made between your business, your customers and the invoice factoring provider. Charges apply for credit and debit cards, BACS payments and wire transfers.
  • Set-up fees: These vary lender to lender but cover the cost to set up your business with your chosen invoice factoring provider.
  • Overdue fees: When invoices expire and still need to be paid, charges for each day payment is overdue can apply until the money is repaid in full.
  • Administration costs: The invoice factoring provider will conduct a variety of services including audit charges for business documents and application fees to process final statements.
  • Early termination fee: There is usually a 28-day notice period for invoice factoring. If your business chooses to terminate its contract with the factoring provider early, you may be charged an early termination fee.
  • Annual fees: For invoice factoring contracts that start from 12 months, an annual fee will cover the cost of keeping the facility open for one year.

Is invoice factoring a good idea?

Invoice factoring is an essential solution for businesses suffering from lengthy periods of unpaid invoices. Having a huge impact on cash flow, invoice finance provides funds to cover the short term, enabling business activities to continue as normal. If you have an extensive list of customers to pay invoices, this may be worth considering. With that being said there are both pros and cons to this product that should be understood before making any decisions.

One benefit is that factoring companies typically offer businesses bad debt protection for a small extra cost, which is an additional service definitely worth considering. Usually, these rates range between 0.5 – 2% of your business’ annual turnover. Bad debt protection is a form of non-recourse factoring where the factoring provider can take on the credit risk of your clients’ unpaid invoices, protecting up to 95% of your debtor balance.

You should also be aware of the fact that invoice finance is currently unregulated in the UK, which means that you are not protected in the same way you are with consumer finance products. However, the Asset Based Finance Association is the leading trade body for factoring companies. ABFA’s members follow a strict code of conduct to ensure responsible lending, and consumers have access to their independent Ombudsman for any issues.


Frequently Asked Questions

If you want to learn more about invoice factoring, then make sure to checkout our FAQs below for more information.

Invoice financing is the process of borrowing money to cover the cost of unpaid invoices of clients who owe the business money. It essentially means that a business can still pay its employees and receive cash flow whilst they wait for their invoice to be paid.

Invoice factoring is where a business sells its outstanding invoices for a smaller percentage of its total value to an invoice factoring company. The invoices are bought by the invoice factoring company who chase and collect the unpaid invoices. As the money is borrowed against the business’ unpaid invoices, the business can receive a proportion of the money upfront and do not have to wait around or risk not getting paid at all.

To receive business invoice factoring you need to submit an application with details about your outstanding invoices. The application will then be assessed for how much risk is involved to lend to your business.

If successful, you’ll be given a quote on what percentage of the invoices the lender will buy upfront, you will then receive that money. It is then the responsibility of the lender to chase the outstanding invoices from clients. Once the invoices have been collected and paid, the lender will repay the remaining balance, minus any fees or charges that accrue.

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