For businesses needing to bridge short term finance gaps, Factoring should be considered as a credible alternative to the standard bridging loan.
Factoring is a process where your Sales Ledger, Billing and Debt collection procedure are all outsourced to a Factoring company. Such arrangements occur for an extended period and are usually subject to a minimum term of 6 months but often run for much longer due to the benefits they bring to the business owner. This process can be either confidential (invoices still get issued in your company’s name) or disclosed (invoices issued in the name of the factoring company) and is available to any company/partnership/sole trader dealing Business-to-Business and raising invoices with credit terms as long as the company/partnership has an annual turnover of at least £50,000. Factoring is also available to start-ups and Phoenix companies in some situations meaning it is a great source of working capital finance for a company in its formative stages. There are no geographic restrictions meaning such finance is available all across England, Wales, Scotland, Northern Ireland and, indeed, several countries worldwide. Non-recourse Factoring is also an option where an extra fee (approx 0.75% of the value of invoices) is paid to mitigate against bad debts. If a bad debt occurs, the loss is worn by the factoring company, not you.
We recently had a client who ran his own construction business. He came to us looking for a £50,000 bridging loan to make payments due at the end of the month. On closer examination of his situation we determined that his cash-flow squeeze was due to some work that had been completed and billed but as credit terms of 60 days had been extended to the client, the money for the work wasn’t due for another 6 weeks. In this instance we recommended the client speak with a Factoring company to alleviate not just this cash-flow squeeze but all such instances that were regularly a part of his billing cycle. Within 10 days the client was set up with the Factoring company, his billing process was outsourced (much to his relief as it meant he no longer had to chase debtors for payment) and he received upfront cash worth 80% of the invoices issued to that point with the balance (less charges as outlined below) due when the bills were settled. More importantly the client also now had a very professional and efficient Billing function working for his company so similar cash-flow squeezes could be avoided in the future.
The charges for Factoring vary but due to the fact this client had an annual turnover of almost £2m he paid only a 0.5% service charge and an interest rate on the credit extended equivalent to 6% APR, meaning it was a far cheaper option for him than a Bridging loan and far less inconvenient than having to offer his own personal home as security for this loan.
A further option is Invoice Discounting which works on a similar principle but doesn’t require the entire Billing function to be outsourced. For more information on the differences see our Guide to Invoice Finance here.
At Choice Loans we can put you in touch with some of the best Factoring companies to provide your business with a consistent and reliable stream of short term funding, helping you negotiate the regular cash-flow squeezes that can occur as part of a normal billing cycle. To find out more either call us on 0845 1260350 or complete our Invoice Discounting/Factoring application form here