Invoice factoring can provide insolvent businesses with a steady, predictable and much-needed flow of cash without having to take on further debt from traditional funding routes.

When a business is facing insolvency, timing is everything and factoring can provide fast access to working capital by releasing the value locked in accounts receivable.

The factoring company also handles credit control, freeing up the business’ valuable resources. Business owners spend around 10% of their working day chasing down unpaid invoices, according to research findings.

Invoice factoring is well suited to businesses that have been turned away by the banks and other traditional lenders. It is not a loan, but the purchase of a financial asset, the receivable, to be converted into another asset, cash.

Factoring gives the insolvent business a fast cash flow boost that can be used to meet its operational requirements, such as payroll and purchasing.

As factoring is secured against the company’s accounts receivable, it’s perceived to be less risky for lenders than other types of traditional loans. The risk of providing a cash advance is based on the invoices rather than the history or creditworthiness of the business, which is a metric used by banks to assess lending risk.

What is Invoice Factoring?

A cash-strapped business sells its outstanding invoices or accounts receivable to a factoring company that collects payment of these invoices from the business’ customers.

The factoring company typically pays the business for their unpaid invoices in two instalments: an advance of around 80% to 90% of the value of the invoice, which frequently enters the business within 24 hours of the invoice being raised. The balance is paid once the invoice has been paid by the customer, minus the service fees.

Security Requirements

The primary security for factoring is a personal guarantee, which is an agreement that makes the business owner personally liable for the funding. In short, if a personal guarantee has been signed, the factoring company can pursue the assets owned by the business as well as the business owner’s personal assets, such as home, car, etc., if it is unable to collect payment for the unpaid invoices.  

Most factoring companies will also ask for an asset debenture or a ‘floating charge debenture’ over the company.

This is a formal agreement between the business owner and the factoring company, which is filed at Companies House at the same time as the finance is raised. Should the business face insolvency proceedings, the debenture states that the factoring company is to be repaid from the sale or ‘realisation’ of the company’s assets before any other unsecured creditors. It grants the factoring company priority rights on repayment should the company go into liquidation.

Choosing a Factoring Company

Business owners need to consider whether they will opt for a factoring company that is a subsidiary of a major financial institution or a smaller independent provider.

Another major consideration is customer service as the business will need guidance on the initial set-up process. The provider will have to answer many questions and explain the terms of the agreement clearly. Therefore, choosing a professional company where customer service is a priority is critical.

Finally, some factoring companies specialise in certain industries whilst others can operate across almost every sector. Business owners need to find a factoring company that has a bucketful of experience in the industry in which their business operates. It’s always worth approaching more than one factoring company before making the final decision.

Do You Need Expert Advice on Alternative Finance?

If you would like to know more invoice factoring or other types of alternative finance that may be more suited to your business, please call Mike on 07912 344 394 or email for free and confidential advice from one of our professional advisers.

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