If you have limited cash flow or slow paying customers you’ve probably heard of invoice factoring.
If not, it’s a financial product where you sell your invoices to a factoring company for a fee. In return, you get around 60-95% of your invoice amount paid into your bank account within a couple of weeks.
The factoring company then collects the funds directly from your customers.
When factoring can make sense
Until recently, factoring was one of the fastest ways to get access to funds to grow your business. Because you’re selling an invoice, you don’t have to put up additional collateral to secure the money. Although, if you have a poor credit rating you’d expect to pay eye watering fees or be unapproved.
Now new alternatives offer fairer solutions for SMEs
Factoring can be expensive. This eats into your profits making it difficult to grow.
Since factoring companies collect payments directly from your customers, you’re putting part of your customer relationships into their hands. Expect it to be direct and forceful. Plus, most companies work with factoring companies when they’re experiencing cash flow issues. This can look bad.
Many factoring companies also require that you enter into a long-term contract.
Thankfully, there are other options that offer similar services. Unlike factoring, they benefit you and your customers and are designed to support your growth rather than just your survival.
One option is a credit stretch.
A credit stretch
How does a credit stretch differ from invoice factoring?
Firstly, with factoring you hand over payment collection to a factoring company. With a credit stretch, you offer your customers 60 days extra to pay their invoice, so you can get paid immediately. You do this upfront, proactively. Not reactively and at the last minute like with factoring.
Secondly, the speed. Invoice factoring is a slow process - often weeks. With Fellow Pay, you’ll get the money seconds after you and your client sign the agreement.
Thirdly, your credit rating doesn’t matter. At all. We only care about your customers' credit rating. We assess that in seconds. So you’re A LOT more likely to get approved with a credit stretch.
And, the price. A credit stretch costs just 3% of the invoice total amount and your buyer gets 60 days extra to pay their invoice. With no hidden fees at all. Factoring costs are at least 4% and up - and come with a range of additional fees.
Also, s credit stretch is very easy to use. You create an account. Tell us the invoice amount. We’ll credit check your customer. If you’re approved, you and your client will get an agreement, once signed you’ll receive the money and they’ll get their credit immediately.
Why you’d use a credit stretch (and when)
If industry standard long payment terms are affecting your ability to grow, and you want the money from those invoices in your account as fast as possible without hurting your customer relationships, a credit stretch is perfect for you.
But unlike a loan or line of credit, you must have already completed work for your customer and be waiting for that payment to land in your account. This rules out businesses that collect money the moment they send an invoice.
Instead of waiting until the work is completed, we recommend that you discuss a credit stretch with your customers. You can offer 60 days extrato pay their invoice. If they want to extend for an extra 30 days, it will cost them just 1% of the total invoice amount.
Agreeing this upfront will mean you could receive the money for the invoice amount just minutes (even seconds) after you’ve sent the invoice. You’re also guaranteed to get paid because the credit stretch is insured.
A credit stretch is a proactive tool for getting money faster to use to grow and further improving your customer relationships.
But it’s not right for everyone.
If a credit stretch isn’t right for you, you could try invoice finance.
How does invoice finance differ from invoice factoring?
Like factoring, invoice finance is faster than getting a loan.
Unlike factoring, you don’t sell your invoices to a third party. Instead you borrow money against your invoice.
The invoice, and proof of work, that agrees payment between you and your buyer proves to the invoice finance company that you’re due to receive payment within a certain timeframe.
The agreement secures the finance for you.
That’s great. But it comes with some strict criteria.
Some companies require that you use specific accounting software. Others require you to be very creditworthy and a credit rating can take some time. They will assess your transaction history. If it’s not healthy, don’t expect a yes.
Like a credit stretch, there is a limit to how much you can borrow. No more than the total amount of the invoice (often less the VAT). If you need more, you’ll need a loan or a line of credit.
Unlike factoring and a credit stretch, invoice finance will give you the full amount of the invoice - 100%. Instead of the 80% (less the VAT) of a credit stretch and often even less for factoring.
Invoice finance is a good option, but the risk is in your client now paying you back. If you borrow the full invoice amount you still have to pay that back and the interest. If your client hasn’t paid you yet, you’re going to be down 200%+. For a company that likely has poor cash flow, that could be fatal.
Why you’d use invoice finance (and when)
For similar reasons to a credit stretch. To cover periods of poor cash flow. To use the money you’re owed from unpaid invoices to continue to grow your business.
Invoice finance has been around for a few years (many less than factoring) and has been improved greatly by the recent innovations in fintech.
If you’re not comfortable selling your invoices to a factoring company and your customers aren’t interested in receiving 60 days extra to pay the invoice, then invoice finance is your best option. It’s pretty fast, not too expensive and if you have a healthy credit rating and great transaction history you shouldn’t find it too difficult to get approved.
Just make sure your customers pay you back!
If factoring, invoice finance and a credit stretch aren’t good for you our final option might just work.
A line of credit
How does a line of credit differ from invoice factoring?
The only similarities between a line of credit and factoring is that they’re financial products.
The reason you’d need a line of credit is probably different to the reason you’ll need factoring. That doesn’t mean it’s not a good alternative to factoring.
A line of credit gives you rolling access to money. You can use it when you need it. And sometimes you’ll only pay interest on what you use.
If you get a line of credit for €100,000, you’ll only need to withdraw the money when you need it. Instead of the pressure to pay back the money within a few months.
So a line of credit can be pretty great. But the problem occurs in the getting of the line of credit. That can be tough.
If your creditworthiness is fantastic, expect to pay a lot more for your money. You could be victim of some very high fees, too.
Lines of credit can be risky. If you use it all and can’t repay it, you will be personally liable for the debt.
However, if you have a healthy business with a stellar credit rating and plans for long term growth, a line of credit is a good option for you.
Why you’d use a line of credit (and when)
If you have a strong financial business and plans for sustained growth but customers who are a little slow to pay and that’s holding you back, a line of credit could work. But I’d still opt for a credit stretch or possibly invoice finance.
If you have plans to launch a new product range or open new premises and don’t need the money from unpaid invoices to do that then a line of credit will work very well for you.
If you can get one, with a decent interest rate, a line of credit can be a good asset to help you grow.
What is the best option for you?
There are times when invoice factoring makes sense, but as the fintech revolution continues to thrive the traditional, manual process of factoring costs too much and takes too long.
If you want the full amount of your invoice paid within a few days, choose invoice finance. Plus, it won’t affect your customer relationships.
If you want the money instantly, for the lowest cost and you want to not only protect your customer relationships but offer them even more value, then choose a credit stretch. And because the stretch is insured you are guaranteed to get paid and don’t need to worry about your customer paying you.
And if you’re planning on launching a new product range or building something new, a line of credit could be a better option than getting a long term loan.
If you’re interested in applying for a credit stretch, you can create an account today (it takes just 5 minutes) and then you’re free to find out if your customer is creditworthy enough for us to finance you.
Click here to create an account today.