Latest figures show that over the past year 8% more SMEs are turning to this form of financing. The FDA now has approximately 27,000 clients with a turnover of less than £5 million.

FDA chairman Paul Hancock attributed this increase to two reasons. “As the economic climate is slowing down, late payments may be affecting companies’ cash flow,” he commented.

Invoice discounting and debt factoring can help smooth out the trickles and waterfalls of cash flowing through a business. As more enterprises realise this and the economy worsens, so more SMEs are turning to factoring firms to collect their debts and advance them this money.

As well as boosting short-term working capital, factors can free up a company’s time from chasing slow-paying customers and also protect against bad debts.

Hancock explained: “Factoring and invoice discounting provides a flexible form of funding for SMEs. The time that a small business with few employees would have to normally spend on chasing debts, that resource, can be put into something else.”

The FDA says a factoring service will undertake all credit management and collections work of a company’s debt, including taking responsibility for the sales ledger, following an agreed credit policy, ensuring the prompter payments of that debt without harming a customer’s goodwill.

The factor will pay 80% to 85% of the company’s outstanding invoices (the approved debts) immediately, with the balance, less charges, paid when the customer pays. Some services offer protection against bad debt losses, but this is not automatic.

An invoice discounting service differs primarily in that, by contrast, the company maintains control of its sales ledger and the service is normally kept confidential from its customers.

For further details on factoring and invoice discounting as alternative forms of financing and to access organisations which provide these services, visit the Factors & Discounters Association’s website at www.factors.org.uk.

See also: 15 ways to improve cash flow