Invoice Factoring for SMEs
Being able to maintain positive working capital has always been a clear sign that your business’ finances are healthy and able to carry your day-to-day operating expenses. However, nothing in business is truly certain, highlighting the need for constant vigilance. Yet sometimes, you may run into issues which could undermine your business’ financial security and ability to keep on top of your working capital expenses. Rather let the situation escalate, you could gain access to your account receivables by taking a look at what Invoice Factoring has to offer. So if you’re currently experiencing negative working capital, or expect to do so in the near future, here’s what you need to know about Invoice Factoring.
What is Invoice Factoring?
Invoice Factoring is a popular finance solution widely used in a range of UK sectors and industries for its ability to help business owners manage their working capital expenses. However, this product can also be used to support other issues affecting your business as well, including cash flow, tax demands, equipment repairs, unexpected payment requests, inventory supplies or even emergencies. If you’re able to trade goods and services on credit with other businesses that are considered creditworthy (after performing the necessary checks) you could gain access to the money that you’re owed sooner by applying for an Invoice Factoring arrangement.
How does Invoice Factoring work?
Invoice Factoring works directly with your business-to-business (B2B) invoices. If you possess an annual turn over of no less than £25,000, you could release up to 90% of the capital held within each of your unpaid invoices worth at least £5,000, allowing you to support your working capital expenses and/or any other aspects of your business that need funding. Yet once an agreement has been established, and the funds dispensed in your account, it is then your job to pursue the debtor for the funds that they owe your business. However, if you don’t wish to do this, another useful aspect of Invoice Factoring is that you have the option of allowing the debtor to pursue them on your behalf, saving you time. And when the debt to your business has been resolved, the lender will then release a balance to your business, consisting of the remaining amount the invoice (e.g. the remaining 10%), minus their costs and fees.
How do I apply for Invoice Factoring?
If you’re having issues staying on top of your working capital expenses due to late or delayed payment terms, or need to support other aspects of your business such as cash flow, applying for Invoice Factoring could see an agreement put in place in as little as 48 hours with the funds arriving soon after. But, as well as being able to trade on credit and having an annual turnover of at least £25,000, what else will lenders be taking into account? To ensure the success of your application, here’s what else you need to be aware of:
- Customer Creditworthiness: If your business trades on credit, you should always check the customer’s commercial credit rating before offering your goods and/services - which is what Invoice Factoring lenders will also want to assess. So alongside your own commercial credit report, they’ll request permission to review your customer’s creditworthiness as well, incorporating into their checks anything that could suggest a risk of defaulting. This includes details such as past or outstanding CCJs, bankruptcy records, Accelerated Payment Notices, existing finance agreements, unpaid debts and if they have a history of paying debt on time.
- Security: Invoice Factoring is a form of Secured Asset-Based Lending which uses the concerned B2B invoice as collateral. So if the debtor (your customer) defaults and doesn’t repay what they owe you, your business will be expected to resolve the agreement in their place. However, some Invoice Factoring providers may also offer Bad Debt Protection as standard, safeguarding your business if such an event was to occur.
- Documentation: In addition, you’ll need to provide a number of documents with your application, which should be outlined by the Invoice Factoring provider. As well as proof of identity, you may be asked to present anything from up-to-date business ledgers, account receivables reports, turnover reports, profit and loss statements, cash flow forecasts, and details on your key customers to the actual invoices your financing.
Could your business benefit from Invoice Factoring?
Whether you run a small business or an established company, staying on top of your working capital expenses is a vital responsibility. But if you experience a cashflow shortfall or your operating costs were to increase, maintaining your business’ finances could prove problematic. However, the Alternative Finance Industry offers you a number of ways to support your business and come out on top, including Invoice Factoring. So if you’re business stands to benefit, all you need to do is source an agreement from a lender you can trust, which is where we can help.
At Rangewell, we’re an Access to Finance specialist working with over 300 lenders to offer you a comprehensive overview of more than 23,000 business finance products. Our services are free to use for business owners and their advisors and we’ll also guide you through the application process. So if you’re looking for a way to support your working capital expenses or provide funds for any other aspect of your business, apply for Invoice Factoring today or find out more with Rangewell.