Member Article

Factoring: Is it still relevant in 2015?

No business owner wants to give their customers and suppliers the impression that they are struggling financially – particularly if this isn’t the case.

This has long been a common misconception and can be an obstacle for companies considering invoice factoring, where a business raises working capital by selling its unpaid invoices to a finance provider, which then takes on the responsibility of collecting what is owed.

Who is it working for?

Some company owners still fear that their customers will think the worst if they receive invoices from a factoring company, but nowadays, thousands of firms in a variety of industry sectors across the UK are thriving having embraced this alternative finance solution.

Invoice factoring remains a particularly positive choice for smaller companies lacking the resource to handle credit collection. These businesses get the greatest benefit from factoring: not only does it release the cash tied up in their unpaid invoices, but it also enables them to outsource the credit control functions to dedicated professionals. A specialist provider is even likely to be able to get the bills paid more quickly.

Firms across a wide range of industries are benefitting from factoring - from services and manufacturing to distribution and transport. Their clients increasingly understand that factoring is a mechanism that enhances cash flow and operational efficiency, rather than a signal that the business is in any kind of financial difficulty.

What are your other options?

In a commercial environment that has been transformed since the financial crisis by alternative funding solutions, factoring is no longer seen as an option of last resort. What’s more, it’s worth noting that factoring is not the only alternative finance option for businesses seeking to unlock value from their unpaid customer invoices. Some companies may prefer invoice discounting, where they retain responsibility for their own credit collection.

In fact, invoice discounting today accounts for the lion’s share of this type of lending. In 2014, according to the Asset Based Finance Association (ABFA), British businesses raised around £1.4bn worth of finance from factoring – invoice discounting, by contrast, raised around £17.8bn.

Many companies prefer invoice discounting so that they can maintain all financial communications with their customers. Invoice discounting enables these SMEs to access the money tied up in their unpaid invoice the moment it is raised without the customer knowing about the arrangement.

It’s important that businesses investigate both factoring and invoice discounting before deciding that one route or the other suits their company better.

“Both types of invoice finance offer advantages over traditional funding solutions such as overdrafts or loans, and together, they represent an increasingly important source of finance for growing businesses.“ Jeff Longhurst, Chairman of the ABFA

This post first appeared on the Close Brothers Invoice Finance blog (https://www.closeinvoice.co.uk/news-and-insights/blog).

This was posted in Bdaily's Members' News section by David Thomson .