Is Invoice Factoring For Me?
Only you can answer this question
This is a question that at the end of the day only you can answer. There is however a number of questions that you can ask yourself that will help to decide if you both qualify for invoice factoring and it's in your best interests to use an invoice factoring company.
The questions you should ask yourself are:
Do you have a turnover of more than £50,000?
While there are invoice factoring companies that will deal with small turnover and start up businesses, generally a factoring company will not consider you for an agreement if your turnover is less than £50,000 per annum. Each invoice factoring company will have its own criteria but this is a good guide value to start thinking about invoice factoring.
How many customers do you have?
If you only have a few customers then it is not always easy to find a factor. Some companies may have substantial turnover but just with a handful of customers or even with just one! If this is the case invoice factoring may not be for you.
Do the majority of you sales, in value terms, come from a small number of customers?
While you may have a large number of customers take a look at how they contribute to the total turnover of the business. If you find that you have a customer that provides more than 1 third of your turnover on its own, this may be a stumbling block for invoice factoring.
What are the payment terms of your customers in comparison to your industry average?
Factoring companies look at the industry you are trading in and a make a comparison against the industry average for payment terms. For example you industry average may be 60 days payment terms, however you may have been offering 90 days to help attract new customers. If this is the case do not be surprised if a factoring company asks you to make changes to your payment terms if they offer you a factoring agreement.
Do you sell to the general public or commercial customers?
In pretty much all cases, invoice factoring companies only provide facilities to companies that trade with other commercial organisations and not with the general public. If you have mix of the two, e.g. you have a trade counter for your business then this is something you should discuss with a factoring company to see if the facility can be made available for the commercial invoices only.
Do you have lots of small invoices?
While a large number of invoices in not normally a problem, an invoice factor does consider the values of these invoices. This is based on the administration involved with each invoice and therefore the viability of a factor agreement. An example would be the administration costs to manage 100 invoices of £1 each in value being 100 times more work than administering a single invoice of £100 in value.
How many queries and disputes do you get from your invoices?
This is quite an important factor when considering invoice factoring. You should know from your experience and historical records what % of your invoices have been queried in the past. Averages range from industry to industry although invoice queries are fundamentally down to customer satisfaction and accurate invoicing.
How stable and reputable is your business?
The stability and reputation of your business is a speculative question and sometimes a little difficult to prove. If you have had problems in the past or your business is in an unstable industry factoring companies may refuse you a facility or ask for references to back up your reputation and credibility for an invoice factoring facility.
Do you have customers that make part or staged payments?
Invoice factoring companies do not like staged or staggered payments on invoices as this leads to a much larger administration job. If this is how your business has traded and what your customers expect then Invoice factoring may not be a suitable service for you.
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