It doesn’t matter what size your company is, you’ll only succeed if you have enough cash. You can look profitable on paper by selling for more than it costs you to produce but if those sales don’t turn into cash quickly you can be in trouble. There’s an irony too in that sometimes the more successful you are the easier it is to run out of cash because you’ve tied it up in stock or manufacturing costs. You then start turning away orders because it becomes too risky.

In the past you might have asked your bank to help you free up some cash with an overdraft facility to see you over while you waited for your customers to pay some of your invoices. Banks aren’t great at lending to small businesses these days though: they don’t like the risk.

So that would have left factoring and invoice discounting as your next ports of call. But they’re not all their cracked up to be either. Factoring means passing control of your invoice book to a lender who will advance you money against it while invoice discounting means borrowing against your unpaid invoices. They’re both forms of debt and debt isn’t great for your business – debt means risk.

Here are five reasons why factoring and invoice discounting aren’t great ideas;

    1. You won’t get the full value
      When a lender lends it takes on risk. It protects itself by lending less than the value of its security – your invoice. So the chances are you’ll get no more than 80% of your invoice. In fact 80% is a ceiling and you’ll be lucky if you get anywhere close to it. Figures published by the Asset Based Finance Association show that in the second quarter of 2016 the industry advanced £16.3m against outstanding invoices of £37.5m – an average advance of 43.5%. By the time you’ve factored in the charges, which are many and varied (see No. 2) you’ll wonder why you bothered.
    2. Big charges
      Setting up an invoice financing facility can cost you as much as £5,000 and that’s just to set it up. The annual running costs can be somewhere between £10,000 and £20,000. There are other charges too. I’ve come across products with 35 different ways of charging; I’d love to hear from anyone who has found a product with more than 35 charges.
    3. The small print
      Well done if you make it onto the invoice-discounting field of play – you’ll have jumped through a lot of hoops to get there. But having got there you’ll now find it difficult to get out. Your lender will wrap you up in a lengthy contract with notice periods and covenants that pretty much allows it to poke its nose into your business whenever it wants.
    4. Personal guarantees
      When lenders lend they want to be damned sure they’ll get their money back. Although you’ve put your outstanding invoices up as security that won’t be enough: there’s no certainty that your customers will pay up. So your lender will ask you to guarantee the debt personally and if it doesn’t get its money it will come after you and your assets. Personal guarantees mean you risk your home.
    5. Damaged relationships
      When you use a factoring or invoice discounting company you hand over complete control of your invoice book. The factor’s only motivation is to make sure your customers settle their invoices – the relationships you’ve built mean nothing. Your customers may not take too kindly to relentless badgering for payment from a faceless factoring company; they may pay up but they may also decide enough’s enough.

Is It Really Worth It?

Surely you would only go through this if there was no alternative. If there was an alternative where…

– You received the full value of your invoice

– You pay just a small discount- there are no lock-ins or covenants

– There are no personal guarantees

– Your customer relationships are intact

…You would use it. Wouldn’t you? The good news is that such a solution already exists.

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