Bank lending to small businesses fell in the first two months of this year according to reports from the UK banking secto. This is causing business owver to take other forms of business finance such as factoring and invoice discounting.
Factoring is a common method used by business to increase business cashflow. In the last 12 months businesses requesting invoice finance facilities have risen over 30% according to The UK Insolvency Helpline busiiness advice team.
However not all businesses qualify for invoice finance and certain requirements must be met such as personal guarantees may be requested if business owners have been subject to an IVA or bankruptcy
Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.
Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.