Invoice factoring

Invoice factoring is an invoice finance facility that businesses use when they sell their outstanding invoices to a factoring company at a discounted rate.

They get an advance on the money they’re owed whilst the lender takes over the credit collection process.

Thousands of businesses choose Sonovate because, unlike the banks, we’re really easy to work with and we’re on hand to help you anytime.

The platform we’ve built makes it really easy to manage and fund contractors. And unlike others, we pay 100% of the invoice.

Fill out the form and we’ll be in touch to show you around and get you funding in no time.

There are many benefits associated with debt factoring, especially if you are a small business or startup.

What are the advantages of factoring?

Plug the cash flow gap

One of the most vital advantages of invoice factoring is plugging the cash flow gap of your business. Whether you need the money to take on new projects, pay contractors, hire new employees, or cover your overheads, a steady cash flow is vital.

Quick turnaround

In comparison to other, more traditional, forms of financing, invoice factoring has an incredibly quick turnaround. You can set up debt factoring in a matter of 24 hours and start receiving the cash your business needs.

Less risk

There’s not as much risk to your assets because your unpaid invoices act as collateral. You probably won’t be asked to put any valuable assets, like real estate or equipment, on the line when you use invoice financing.

Higher approval rates

Another advantage to debt factoring is that there are more chances of getting approved for financing. Banks demand a multitude of requirements in order to secure funding. Instead of examining your company’s credit history, invoice financing companies will focus more on the credit quality of your debtors.

No chasing

Outsourcing the task of credit collection is another of the advantages of invoice factoring. Small businesses or startups that don’t dispose of the time or resources to be chasing clients for their payments can benefit immensely from this service.

Customer credit

Factoring companies will only agree to finance invoices if the customer has a favourable credit history and they can even help you scope out potential clients. This can deter you from going into business with unreliable customers.

Improved relationships

Finally, invoice factoring could even help you improve your overall relationship with clients. More often than not, asking for money can be unpleasant or awkward but having a third party take over can relieve this pressure.

FAQs

What is invoice factoring?

Invoice factoring is an invoice finance facility that businesses use when they sell their outstanding invoices to a factoring company at a discounted rate. They get an advance on the money they’re owed whilst the lender takes over the credit collection process.

How does debt factoring work?

Debt factoring preserves the cash flow in a business by quickly financing unpaid invoices.

Instead of having to wait weeks, or even months, for your clients to pay their invoices, you can finance them with a factoring company.

Once you agree on a service fee, you pass on the invoice to the factoring company and this amount is advanced to you in a matter of days.

What are the different types of debt factoring?

Broadly speaking, debt factoring refers to the sale of unpaid invoices to a third party at a discounted rate in exchange for instant cash.

Debt factoring and invoice factoring are two terms that are used interchangeably. There are different three types of debt factoring available, more specifically, recourse factoring, non-recourse factoring, and undisclosed or confidential factoring.

If a business has agreed to recourse factoring, they become liable for any unpaid invoices that the factoring company could not collect payment for. In this instance, businesses must pay back the cash advance in full.

Non-recourse factoring is when the factoring company takes liability for the unpaid invoices that they could not collect payment for. However, non-recourse factoring is a more expensive and, therefore, a less common type of debt factoring.

Undisclosed, or confidential factoring, is the halfway point for businesses whose balance sheets aren’t strong enough to secure invoice discounting services. The company benefits from factoring services in a more discreet way as the debtor is unaware of the involvement of a third party.

What’s the impact of factoring on the balance sheet?

Cash flow management is an essential aspect of any company but even more so if you are a start-up or small business.

With a steady stream of revenue at your disposal, you no longer have to worry about paying your contractors on time. This reliable cash injection is especially useful if your company suffers from seasonal demands or lengthy payment collection times.

Debt factoring allows you to cover your expenses and helps fuel growth in a sustainable manner. This type of financing offers recruitment agencies a more flexible solution to short-term cash flow problems.

Is invoice factoring considered debt?

No, invoice factoring isn’t considered debt because you are selling your unpaid invoices to a third party at a discounted rate.

You’re not borrowing additional capital, you’re simply receiving the money you are already owed, ahead of time.

What’s the difference between factoring and credit insurance?

Credit insurance is a way to ensure that you receive your money even if your client declares bankruptcy.

Credit insurance will only pay out your unpaid invoices if the debtor cannot pay due to insolvency. It’s more of a guarantee against customer risk than a financing route.

Invoice factoring and credit insurance tend to go hand in hand. It’s a way for businesses to protect themselves against the risk of non-payment.

What happens if a client doesn’t pay an invoice?

Debt factoring companies will always try to avoid this scenario by managing accounts, vetting customers, and chasing after payments in the most effective way possible.

Nevertheless, if a client doesn’t pay an invoice, either you or the factoring company takes responsibility for the outstanding payment.

More often than not, businesses will opt for recourse factoring, which means your company buys back the unpaid invoice and takes on the responsibility for the non-payment.

If you have agreed to non-recourse factoring, your factoring company is liable for the risk and you are typically absolved of having to reimburse the unpaid invoice.

Sonovate offers its clients bad debt protection on 90% of their net invoice value. This means your cash flow can remain unaffected and healthy even if a debtor fails to finance their invoice.

For example, if you issue an invoice for £10,000, you will be protected for £9,000 of the debt. Typically, this bad debt protection is only available when client payment terms are less than 60 days.

How long does it take to set up invoice factoring?

Invoice factoring is relatively quick and easy to set up, especially in comparison to other forms of financing in the UK.

After your first appointment, your business could start using invoice financing services in as little as 24 hours.

Once your clients have been vetted and your financing has been approved, you can start receiving advances on your unpaid invoices almost immediately.

Is factoring suitable for startups?

Yes, invoice factoring is a great solution for startups that are beginning to establish themselves in their sector. To be eligible for invoice factoring, you must be a business invoicing other businesses with a minimum turnover of £50,000.

Startups may encounter some difficulties when it comes to securing a loan or overdraft from the bank. Traditional forms of financing demand a multitude of requirements, such as established trading records or high credit scores, whilst invoice factoring will focus more on the credit history of your clients.

Startups are always in need of liquidity and invoice factoring can provide this without the risk of incurring additional debt. Quick access to cash and an outsourced credit collection service gives startups the opportunity to focus on growing their business.

Finally, invoice factoring helps open the door for startups that want to start working with larger clients. If you only get paid at the end of the project, you may not have the working capital to start the job. Invoice financing can help you get an instant advance to the cash that you are owed and help fuel the growth of your business. Start up recruitment agency? Read our guide to setting up

What checks are involved with factoring?

To benefit from invoice factoring services, you must be a business that works with other businesses, as invoices are only accepted on a B2B basis.

The checks on your own company are less extensive than the checks on the history of your clients. Your client must have reputable credit scores before an invoice factoring company agrees to finance their unpaid invoices.

Is debt factoring regulated?

No, debt factoring is not currently regulated by the Financial Conduct Authority (FCA) in the UK.

Since the invoice financing industry is unregulated, borrowers should ensure that lenders clearly state all of their fees and that their contracts outline clear termination clauses.

Nevertheless, the invoice factoring sector has enforced a clear code of conduct to provide the best possible service for customers.

Regulation of the invoice financing industry would incur regulation costs, which are typically passed on to the customers. This would then cause prices to rise and inhibit business owners from receiving the best financing deals.

What is credit factoring?

Invoice factoring is when a business sells its unpaid invoices, at a discount, to a factoring company in exchange for instant access to cash. However, when the buyer is purchasing the order with credit, this factoring is known as credit factoring.

This typically occurs when large retailers work with independent resellers that purchase orders with credit.  Whereas debt factoring is providing finance against the debt of the company, credit factoring is providing finance against the credit of a company.

What is payroll factoring?

Payroll factoring is another way to describe invoice factoring. It’s a method of financing that entails the sale of outstanding invoices, at a discount, to a factoring company in exchange for instant access to cash.

It’s referred to as payroll factoring because many times a business will struggle to pay its workers without a steady cash flow. Invoice factoring, or payroll factoring, provides a steady stream of revenue with the cash that you are already owed.

Can small businesses make use of factoring?

Yes, small businesses can benefit greatly from the use of invoice factoring.

A steady cash flow is essential for the survival of any small business and invoice factoring provides companies with the cash injections they need. Invoice factoring also takes over the credit collection process, which gives small businesses more time to focus on other things like growing the company.

Financing from banks, be it overdrafts or loans, demand many requirements, such as established trading records and high credit scores. Debt factoring doesn’t focus on your personal credit score but rather the credit history of your customers, making it much easier for small businesses to secure financing.

How is invoice factoring different from a business loan?

Invoice factoring is different from a loan because you aren’t accumulating more debt and you don’t need to fulfil a multitude of requirements. Traditional financing institutions will typically ask for more security and collateral than factoring companies.

Unlike business loans, invoice factoring doesn’t take your loan history or credit score into consideration, it only focuses on the payment history of your clients. This makes invoice factoring much easier for smaller and newly-established businesses to secure.

I’m a contractor, how do I benefit from factoring?

As a contractor, you benefit from invoice factoring because you can count on getting paid on time, every time.

Cash flow and liquidity can be an issue for many recruitment agencies. Invoice factoring lenders can advance recruitment agencies with the money they need to bankroll their contractors in a timely fashion.

Our Platform

Sonovate offers its customers a centralised system from which they can manage all invoice factoring services. All your business contacts can be managed in real-time with our easy-to-use app.

Our innovative invoice finance platform offers an easy solution for businesses to manage contracts, invoices, and timesheets. If you’re interested in learning more about the features and benefits of our services, don’t hesitate to book a consultation.