Business Finance You Don't Have To Pay Back*
Factoring's Advantage Over Crowdfunding And Bank Term Loans
If you want business finance that you don't have to pay back* invoice finance (invoice factoring and invoice discounting) could be your answer, in the right circumstances. This gives it a huge advantage over forms of finance such as crowdfunding loans or bank loans. In both cases, the normal course of events is for the business to make monthly payments, over an agreed term, to pay off the sum of the loan and the interest that the funder adds to make a profit. OK, you can raise equity investment through CF, but not without giving away some ownership of your business. This is not the case with IF.
Overdraft Vs Factoring
You may well say bank overdraft gives you the same thing but:
- Overdrafts can be harder to get than factoring and invoice discounting, the latter two can be offered despite poor credit history, even CCJs.
- The level of an overdraft is often much less than the funding from factoring. One piece of our research found the level of funding from factoring and discounting to be over 16 times higher than from overdraft.
Finance You Don't Pay Back
It only struck me the other day that many of the clients that I managed as a Client Manager at Barclays had consistent levels of funds out - they never repaid the finance i.e. their sales ledgers remained at a steady level so their available funding, for example, say 85% of their invoice values, remained constant. As older invoices were paid off by their customers, so new invoices were being raised and receiving funding, hence maintaining the overall value of their sales ledger. In this way, in the right circumstances, they never had to pay any of the finance back*, it continued to revolve - they never had to pay it back, as long as these circumstances continued to be met.
*Please note that: all facilities will have to be repaid according to the terms of facility, for example, if notice of termination is given by the funder.
Exceptions
There were very few examples of highly seasonal businesses, or those with prime debtors that may have fluctuated. In those cases, the funding could be a bit more movable, but where there is a good spread of debtors, consistent levels of payments being received each month and invoices being raised, the funding level tended to be static.
Worked Example
For example, if you had a sales ledger of say £100,000 and you received 85% against that through factoring, you would get £85,000 (I am ignoring fees for this simple example). Say that ledger is aged all within 3 months with the 3rd month being paid by your customers each month. That means that you might expect to receive say £33,333 each month in cash. If your level of sales is also consistent each month, say you raise £33,333 of invoices, the figures balance each other off and your level of funding remains at around £85,000 for as long as you keep using factoring i.e. you never have to pay the finance back.
See this related article that explains in depth the funding differences between a loan and invoice finance.
Finance That Grows With Your Turnover
Now imagine that in the same scenario, your sales are growing and say you raised £43,333 of invoices one month, that's £10,000 more than the norm hence you would get further funding against the new invoices, effectively increasing your funding by 85% of £10,000 i.e. £8,500. So your overall level of funding would rise to £93,500. Once again, this is the other (more commonly understood) advantage of factoring and discounting - the funding grows with your business.
What Next?
You can find out how the funding would work for you and what the price would be: request a quote for factoring or invoice discounting.
