What Is Debt Factoring?
Business owners have plenty of options available when it comes to financing their businesses. At White Oak, we have plenty of business finance products that can be tailored to help supercharge the expansion of your business.
Debt factoring is a type of business finance used by small-to-medium-sized businesses to access finance that’s tied up in unpaid invoices. The flexibility and fast approval process makes it popular with businesses who are looking to improve their cash flow.
We have put together a guide to help business owners who are looking to access this type of finance for their business.
Debt factoring explained
Debt factoring involves selling the unpaid invoices to a third-party. They will be responsible for paying the business a percentage of the total amount originally charged by the client, as well as collecting the payment from the buyer. Businesses can quickly access the capital they need before the clients pay for the goods or services received.
In terms of how it works, it involves three parties, a business, the client and a debt factoring company. Once the debt factoring company has bought the invoice, the business is paid a percentage of the invoice amount due by the client.
After the client has made the payment, they will release the remaining percentage of the invoice payment. The business will receive that finance, minus a factoring fee that’s deducted by the debt factoring company.
Advantages and disadvantages of debt factoring
While debt factoring has many benefits for business owners looking to access instant finance, it might not be the right type of finance for your business. It’s worth doing your research first before you decide to go down this business finance route.
We have put together some of the advantages and disadvantages of using this type of business finance.
Advantages of debt factoring
Improves business’ cash flow
As a business owner that has ambitious growth plans, ensuring that you have a healthy cash flow is crucial to the growth of your business. An advantage with debt factoring is it enables businesses to improve their cash flow, as well as use the finance they’ve acquired to reinvest in the business itself.
Expand your business quickly
If your business is taking on new clients or projects, it may need to expand rapidly by taking on new staff to increase capacity. Debt factoring can enable business owners to boost their working capital, which can give your business the resources it needs to work with incoming clients.
Business is protected from bad debts
Another advantage of debt factoring for business owners is it takes the bad debts your business may incur out of your hands. It’s worth choosing non-recourse factoring where you’ll have to pay higher factoring fees, but it’ll protect your business from any losses if the debtor fails to pay.
Disadvantages of debt factoring
Puts your business temporarily into debt
One of the disadvantages of debt factoring is you’ll have to deal with short-term debt. It’s important that you pay off the debt as quickly as possible to avoid getting into bad debt with invoices being unpaid or paid late by clients. Doing a simple credit check with your clients can help prevent future payment problems your business may face.
Reduce overall profit business makes
For businesses, using debt factoring means that while you’ll have an improved cash flow, it can reduce the overall profitability of your business. The debt factoring company charges a percentage of the invoice value, which can vary depending on how small or big the contract is.
Debt factoring can be useful for businesses who need to give their cash flow a quick boost. They can also help business owners make their expansion plans become a reality by having the finance instantly available to them to create new products and services.
White Oak’s invoice finance product allows businesses to raise finance by selling unpaid invoices. By selling those invoices, the business owner can receive up to 95% of the value of invoices for 60 to 120 days.
For business owners who are looking to finance their business through invoice financing, speak to our finance expert. They’ll be able to help see if invoice finance is the right type of finance for your business.