Factoring and improved cash flow – FAQ’s for SME’s

Q: What is Factoring, or Invoice Factoring?

A: Invoice Factoring, or Factoring as its more commonly known is a form of invoice finance used by businesses ranging from SME’s to corporate multinationals. A business is advanced a percentage of their outstanding sales invoices by the invoice finance lender and when the customer pays the business’ outstanding sales invoice, the lender takes back the percentages loaned, plus any fees.

Factoring is particularly useful for helping small to medium sized businesses manage cash flow.

Q: What are some of the common causes of poor cash flow?

A: Two of the most common cash flow issues affecting businesses are extended payment terms and late payments.  Extended Terms of 30,60 or 90 days may cause firms to struggle to bridge the gap between goods being shipped to customers and payment being received.

Late payments only compound this problem. Whilst extended payment terms are not ideal the issuing firm expects settlement after the 30,60 or 90 days. Late payments occur when payment terms (extended or not) are not honoured and it’s this unexpected delay that can cause cash flow problems.

Some companies also operate in seasonal markets and the need to build up a strong inventory of stock in time for peak trading times can also stretch cash flow. Generally, coming out of a recession potentially presents an even greater risk as businesses can  overtrade as a result of making up shortfalls in previous months, which increases costs of sales and also negatively impacts on cash flow.

Q: How does factoring improve cash flow?

A: Factoring is a flexible form of business finance, and invoice factoring only advances money to a company as and when it issues new invoices. Factoring Finance typically arrange facilities that advances payments of up to 90 per cent of the outstanding invoice value, and normally within 24 hours.

Factoring is capable of bridging the gap between completing a customer’s order and receiving payment, and in doing so give a firm the opportunity to pursue new opportunities without worrying about the impact on its cash flow position and resultant liquidity.

As the facility and advances money secured only against the firm’s outstanding invoices (and not external security as per normal bank borrowing) the amount that can be borrowed will grow directly with any growth sales. The more trading success and growth a firm enjoys, the more funds can be released to pursue new expansion opportunities without the common cash flow problems associated with late payments or extend invoice terms.

In addition to reducing the customer invoice settlement lag from 30,60 or 90 days to 24 hours (depending on terms given),  not worrying about cash flow as much or chasing payments also helps management teams to concentrate on their long term strategic objectives rather than the day-to-day management of the sales ledger.

Savings to the administrative costs of the business are also made as the factoring provider useses its specialist team to arrange payment for customer invoices.

Q: What are the benefits of factoring?

A: Aside from the vast improvement to a firm’s cash flow position and sales ledger management, other advantages of a factoring facility are flexibility and speed.  Having up to 90% of a sales invoice value advanced to your firm some 24 hours after issuing it enables a company to capitalise on demand immediately.

This quick boost to cash flow and capital is therefore available almost as soon as the invoice is raised in order to finance the next order. The funding also grows in line with a firm’s sales ledger, meaning the business is not restricted by the amount it borrows and management can concentrate resources on, and time in, expanding the company.



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