Factoring and Invoice Discounting are two things that, rightly or wrongly, are frowned upon by many business owners. Looking into these two practices on his business website blog, Credebt founder and managing director, Glen Morgan, explores whether the stigma around them is based on mere misconception and what benefits they may actually bring to a business.
To define both practices first and foremost: ‘Factoring’ is when a business sells its invoices to a third party and then the factoring company controls the sales ledger and collects the debts. ‘Invoice Discounting’ on the other hand is an alternative way of drawing money against one’s invoices. The difference is that under these circumstances, the business retains control over the administration of their sales ledger.
Morgan’s Credebt business is well-versed in assisting invoice finance companies, insolvency firms and their clients with issues around cashflow. While acknowledging that factoring and invoice discounting are both practices which seem to worry business leaders, he feels that common misconceptions are to blame for these more negative attitudes becoming commonplace in the corporate world.
Morgan says: “The first common misconception of businesses looking to factor or invoice discount is that the business concerned is in trouble. Many businesses still believe that these completely viable and appropriate forms of raising capital may give the wrong impression; they think it shows a sign that their business is in trouble.”
However, as Morgan explains, invoice factoring could provide an ideal means for businesses to expand and grow in the longer term.
“The truth is that if your business is looking to expand or grow, invoice factoring is ideal. As business owners and operators, we know how difficult it can be to acquire outside funding. Factoring companies wouldn’t want a business in trouble and will only work with those they believe in, those who have a strategy for the business that looks positive and viable.”
Another common perspective of the two practices is that if clients become aware that a business which they are working with is factoring, then they will feel compelled to take their custom elsewhere. Once again, Morgan feels that this idea is based on misconception.
Morgan outlines: “Business owners out there are thinking that if their customers realise they’re factoring, they will leave. However, factoring means that your business will have the support of a financial institution – so what better way to say your business is poised for growth and has the potential to be successful?”
Rather fortunately, Morgan highlights that any factoring companies are becoming increasingly aware o f the negative connotations, and more of them are adjusting their practices to help dispel the stigma.
“Fortunately, most factoring companies are well aware of the misconceptions, and an increasing number of them provide a service whereby they give the impression that all the communications are from you”, he explains.
Morgan goes on to say that, contrary to popular belief, a lot of businesses do tend to use a factoring facility to expand their businesses and grow, rather than as a mere survival tactic, and it can be regarded as a viable means of raising cash.
“Factoring really has become a viable, alternative source of funding to repair cash-flow issues and fund expansion and growth plans. It is also worth mentioning that factoring can be used for financing the types of businesses that banks won’t touch, such as the building industry for example.
“Meanwhile, invoice discounting as a practice is like factoring, in terms of using your accounts receivable as collateral, and you keep the responsibility of collecting the monies and no-one outside the business needs to know of your financial arrangements.”
Measuring up the practices against other means of raising funds, Morgan concluded that choosing to factor or discount invoices could be a better means of raising cash in the current challenging business climate, compared with taking out a loan or increasing the limit of a credit card or overdraft.
“In the current climate, securing anything like a loan or overdraft increase would be a rarity and the risk attached would no doubt fall against some form of security.”
Readers that wish to find out more about Factoring and Invoice Discounting can contact Credebt for a completely free, no obligation call via 0845-6385256 or email info@credebt.co.uk
