For businesses throughout the world receivable financing is nothing new. In fact, in 2000 BC traders in Mesopotamia used a variation of invoice factoring when selling goods. The facility of selling invoices to a third party in order to release funds quickly is something that businesses throughout all ages required.
The rise of receivable financing
Despite being used for thousands of years, it wasn’t until the 1940s when banks got in on the action to provide invoice factoring services and throughout the 70s and 80s when inflation was high; it was a favourable option to choose. Due to its demand and profit-making abilities more and more banks began to offer types of receivable financing, each targeting different industries and offering different terms in order to stay competitive.
The fall of factoring
However, invoice factoring isn’t always beneficial. For a start, many banks that offer invoice factoring are charging high fees for the service. In some cases, businesses are losing out by receiving money upfront and paying high charges, but without another viable option in sight. Furthermore, invoice factoring firms, despite collecting debt on behalf of the business, will hold the business responsible for any unpaid businesses. This means for clients that don’t pay; the business must repay the factoring company or offer a trade with another invoice.
However, perhaps one of the biggest grievances of invoice factoring is the fact that businesses must hand over complete control to the factoring firm with regards to the invoices. This means that the factoring firm will interact with your clients and they may not treat clients in the same way your business would. This can lead to a breakdown in client relationships. Clients may choose to go elsewhere if they are not comfortable with the practices of the invoice factoring firm.
The new era of receivable financing
With the rise of technology, there has been a rise in alternative and start-up finance options. Finance providers quickly realised that traditional forms of financing, such as factoring, is incredibly dated, especially with regards to SMEs who may not meet the eligibility requirements for traditional forms of financing.
For those who are either ineligible for traditional forms or prefer more flexibility when it comes to financing, fortunately, there are now a lot more options on offer.
Some of the more flexible cash flow solutions compared to traditional factoring include;
Flexible Invoice Discounting– This service allows you to release funds from your debtors or invoices. Similar to invoice factoring as you can receive immediate payment from your invoices. However, you retain control of your sales ledger and contact with your clients.
Selective Invoice Finance– To assist with short-term cash flow challenges, selective invoice financing is another cashflow finance solution. Financiers can offer advance payment for your invoice usually up to 85% of the invoice worth. Once the debtor pays the invoice, the business receives the remaining payment minus a small fee for the financier.
If you’d like to discuss the best finance solutions for your business, then get in touch with GapCap for friendly advice.