What is receivables factoring?
Receivables factoring is an American term referring to invoice finance. The implementation of new post-credit crunch bank capital regulations have resulted in banks transitioning companies away from unsecured loans and overdrafts and on to asset based working capital solutions, namely factoring and invoice discounting, both of which have become a major source of working capital financing in the UK.
Factoring of receivables is a means of freeing up capital tied up in invoices with long remittance terms. Factoring facilities are traditionally whole-turnover, whereby, the entire sales ledge of a company must flow through the factor. This can become expensive and not reflect the most cost effective solution for companies to raise their working capital.
Despite factoring now being a major source of working capital financing, it has a bad reputation for various reasons. The following points highlight some of the key drawbacks of factoring:
- It contractually locks-in small companies to sell all invoices
- It incurs expensive ongoing service fees
- It requires high initial arrangement and take-on fees
- It is not regulated, so fund providers can switch off the facility with little or no warning
- Factoring providers often adopt an aggressive approach in collecting invoices, affecting customer relations
- Factoring providers aim to minimise their own risk and factoring can therefore be onerous on the recipient of funds
- Factoring providers enforce many other unfavourable terms and conditions
- Factoring providers exclude certain debtors
- Factoring providers enforce funding limits
Traditional financing and arrangements such as factoring are no longer the best options the market has to offer to raise working capital as the terms are rigid and costly.
Many small businesses witness seasonal fluctuations in cash flow and so selective invoice finance would be a much cheaper solution.
Innovative financial alternatives have entered the market in recent years using cloud-based technology to increase efficiency and speed.
Marketinvoice is a place for selective receivables discounting. MarketInvoice, operates in the online invoice financing space. Unlike traditional invoice finance facilities, MarketInvoice provides an auction platform for you to sell selective invoices to multiple institutional investors, who competitively bid to drive down the cost to the seller.
MarketInvoice is a flexible solution for businesses to increase their working capital.