How Does Debt Factoring Improve Cash Flow
“27% of businesses in the UK (with a turnover of between £1M and £500M) now use invoice finance.” (IGF Powering Freedom Report)
What is Debt factoring?
Debt factoring definition: Also known as invoice factoring, is a complete funding solution and type of accounts receivable finance that allows businesses to be paid faster in return for the products and services they have supplied. It enables businesses to sell any outstanding invoices they have to a third-party commercial finance company.
You can receive an immediate cash injection using your current invoices, rather than waiting 57+ days (an essential element to the making and breaking of your business) on average to be paid. You can simply submit the invoice to a debt factoring company up front, who will buy the invoices off of you and then immediately provide a cash advance of up to 100% of the invoice value. The factoring company will then take full responsibility for chasing and collecting the invoice payments, credit control and processing.
What are the steps involving debt factoring?
- Invoice your customer/client after doing business.
- Submit the invoice to the debt factoring company.
- The debt factoring company will buy that invoice at a discounted rate and provide an immediate cash advance of up to 100% of the invoice value.
- The customer/client pays the invoice when it’s due to the debt factoring company.
- The debt factoring company then pays you the remainder of the invoice, minus a small fee.
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Advantages of Debt Factoring
Debt factoring supports businesses with quick access to funds owed within 24 hours of the request. It’s become most popular within SMEs because of its ability to provide them with immediate access to cash and speeds up the whole process, bypassing the long waiting times generally attached to invoice payments.
With the benefits surrounding debt factoring, its ability to improve cash flow is by far the greatest. Cash flow is crucial to the survival of a business, it’s the key to growth but also day-to-day operations.
By allowing a business to immediately receive the cash value of their invoices it enables them to instantly inject the cash back into the business and function. It bridges the cash flow gap between producing an invoice and receiving the payment and often leads to the company taking on more projects because they have the necessary funds to complete more work.
It increases capital for trade which is extremely important because, for most businesses without any alternative funding sources, the cash flow gap is bridged using personal savings and hefty bank loans to try to stay afloat. Hence accounts receivable is generally an extremely important asset a company can own. However, if you don’t have access to the cash at hand, growth will stagnate.
Imagine if your business received debt/invoice factoring. You’d be able to:
- Take on more projects
- Pay business expenses
- Buy equipment and resource
- Focus on growth, without a waiting period…
The vicious cycle of cash flow for many businesses is that their customers and clients are also trying to manage their cash flow too. Therefore, paying a seller earlier is not in their best interest – causing a cash flow gap. With this in mind, debt factoring caters to both parties, allowing late-paying customers, managing extended payment terms and chasing payments, without running the risk of ruining any relationships.
Meanwhile, the business is able to focus on sustaining growth with instant access to capital to quickly reinvest back into the business. It has also become popular for businesses with poor credit as a quick alternative to business funding. Rather than a one-off loan, debt factoring gives you constant access to cash flow. The more invoices raised, the more access to cash flow you have. In order to be successful, a business must try to maintain a strong and steady cash flow, which is why debt factoring is a great ongoing support for keeping your business afloat.
How can Sonovate support?
Sonovate supports businesses of all sizes with an all-in-one solution platform offering an invoice factoring system with back-office support, or the option of funding only to fit your flow. Fully branded with VAT (if applicable), Sonovate will collect payments on behalf of your company, along with back-office services to help manage the running of your different contractors. Get a free quote to find out just how much finance you can free up immediately to continue building your business.