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• 09 Jul

  Why Use Factoring To Fund Business Growth

  One would imagine that the goal of any business is to achieve growth, although, in the current environment of uncertainty over the economic impact of Brexit, it is clear that many businesses are holding back on their ambitions, awaiting greater certainty.

  Funding Challenges From Growth And Business Expansion

  However, thankfully for the UK economy, there continue to be a good number of businesses that are pursuing a growth strategy, regardless of the uncertainties that are paralysing others.

  GET QUOTES FOR GROWTH FINANCE

  The challenge that many high-growth businesses face, is how to fund that business expansion. For a manufacturer, that could be funding the purchase of raw materials, or staff. For services business it will be more a case of funding people and perhaps equipment, to deliver the services. Inevitably that cost has to be paid in advance of getting paid by your customers.

  The issue with turnover growth, or even one-off large orders, is that they often require more funding than the business is geared up for. Companies have a certain amount of working capital facilities that often only match their normal trading volumes. If those volumes rise, this can cause a funding crisis.

  Use Of Factoring To Fund Growth

  One of the options which can allow businesses to step outside of that restricted cycle of funding is invoice factoring. A factoring facility does not work in the same way as a traditional overdraft or bank loan. With those types of traditional lending facilities, funding is at a set level i.e. the amount of the overdraft or the loan. This can work fine for a business that is trading at a particular stable level, however, when significant growth is introduced into the equation the amount of funding can suddenly fall short of what is required.

  See our related blog post about Scale Up Financing.

  Costs From Expansion

  For example, if a manufacturer secures a large order, the cost of those raw materials, and additional staff, can put pressure on the working capital of the business. If they are funded through a traditional overdraft model, there may not be sufficient headroom in the overdraft to accommodate those additional costs. Factoring works by accelerating the cycle of working capital passing through the business, funding the costs from expansion. In fact, the amount of funding grows as turnover grows - the same is not true of overdrafts and loans.

  Liquid Prepayments And Cash Flow

  Existing sales invoices are made liquid by prepayments against unpaid sales invoices, which releases the majority of the value of the sales invoices into the company's cash flow immediately. This means that these monies can be used to finance large orders or general business growth.

  There do not tend to be restrictions placed on what the money raised can be used for, so it can be used for purchasing additional stock or investing in expansion plans for your business. The use of factoring has the ongoing benefit of continuing to lubricate the flow of money through an organisation. You are no longer waiting for customers to pay for products or services that they have received, prior to being able to utilise those monies within your company.

  Credit Control Outsourcing To Release Your Time

  In addition to the prepayments, the credit control outsourcing service (that forms part of a factoring arrangement) means that you do not need to undertake this yourself or employ credit control staff. This can create another time-saving which can be important in a business that he is going through a period of rapid growth. Our research has found a clear correlation between achieving high growth levels, and the use of invoice funding facilities such as factoring.

  By Glenn Blackman