Reviewed by: Mike Smith on 29 August 2018

How Invoice Factoring Improves Cash Flow for Insolvent Businesses

When a business can no longer meet its liabilities, it is officially insolvent. In this scenario, the company directors have a limited range of options: either raise finance quickly, or consider an insolvency process such as company administration, a company voluntary arrangement, or even liquidation.

The question of whether to fight to save the company or wind it up depends, at this stage, on one crucial question. Is it a viable company? If the answer is yes, raising finance as quickly as possible offers the best chance of keeping the company doors open.

What Makes a Company Viable

A viable business is one where the company has the potential to be profitable, with a clear value proposition and customer base. Many potentially ‘viable’ companies, however, run aground because of lack of cash flow. Especially in cases where there are a fewer number of high-value invoices, the non-payment of these has the potential to scupper the entire company.

Traditional funding is Often Unavailable

Where there are cash flow gaps, funding from the banks has always been the go-to option to shore up the company finances. Many businesses, however, are unable to access business funding such as loans or overdrafts, especially if credit history is less than perfect.  Unsurprisingly, banks are averse to lending money to businesses they consider a higher risk or at least make it a punitively expensive proposition. For businesses in this situation, invoice finance or factoring offers an exciting possibility.

Why is Invoice Factoring Available to Businesses with Poor Credit?

Factoring, which is the sale of unpaid invoices for a percentage of their value, has radically increased in popularity over the last few year since it offers a solution to businesses that may previously have been passed over for funding. It does this because, although the factors do conduct risk assessments, their primary analysis is on the company who owes the invoice, not the one asking for the factoring. If the unpaid invoice appears to have a solid chance of being paid on time (and this can be demonstrated via past accounts, showing payment history etc.) then they are willing to lend (factor) the money.

Advantages of Factoring for a Company Facing Insolvency

  • Money in your sales ledger is unlocked immediately
  • Funds can be available in as little as 48-72 hours
  • Factoring can be completely confidential, unlike any insolvency process which will potentially erode customer confidence once it’s advertised.
  • An injection of cash flow can fend off creditor action (such as a County Court Judgement)
  • Factoring is flexible and can be raised or lowered depending on receivables.

Factoring is a Growth Tool

One thing to remember about factoring is it’s unlikely to help endemic problems in your business. But what it can do is facilitate growth in situations where business expansion is hampered by poor cash-flow. With a receivables factoring arrangement in place, businesses can offer attractive terms to customers with the confidence that they are going to be paid quickly. As an added bonus, factoring may even improve your credit score over time since debt can be kept to a minimum, and increased cash-flow helps you keep on top of current expenses.

Do you Need Help Understanding if Invoice Factoring Could Work for Your Business?

For more information on how Invoice Factoring can help your company feel free to call Mike Smith on 07912 344394 or send an email to finance@companydebt.com

Read more about Invoice Factoring

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