There is some confusion in the UK and elsewhere in the world as to whether factoring is Halal, whether factoring is Haram and whether factoring is Sharia compliant. Much of this confusion comes down to the fact that in Islamic, banking and financial activity must be done with the principles of Sharia. Therefore any financial product that complies with the principles of Sharia is Halal (permissible) and any financial product that does not comply with Sharia is Haram (sinful and prohibited).
Sharia prohibits all forms of usury or riba. Essentially, usury and riba are the acceptance of specific interest or fees for loans of money, regardless of whether the payment is fixed or not. That means therefore that a traditional mortgage or loan from a UK bank is Haram because interest is charged on the money that has been lent. However, there are Islamic finance products available that function instead of loans and mortgages. But if Islamic banks and financial products cannot charge interest, how can they be profitable? Hilary Osborne, the Guardian’s Money editor explains it as follows:
“Banks can profit from helping customers to purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank”.
It’s clear that whilst loans and mortgages may be deemed Haraam, there are alternative products to replace these. But what about factoring? Is it Halal;? Is it Haram? Or are there alternatives? A short definition of factoring is as follows:
“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.”
Viewpoints vary as to whether factoring is Haram or Halal. To many, they see it as a classic case of usury, the invoices themselves essentially being debts and the selling of debts in Islam is Haram. Then, discounting the debt they see as clear case of usury. Others may see traditional factoring in a different light and see ways that it is or can be made Halal.
However the good news is that there are alternatives and there are factoring or factoring like services that are Halal and Sharia compliant. These Islamic factoring services adhere to Sharia principles and offer efficient working capital and liquidity solutions on a non-recourse basis. The exact details of how they work may vary but what they all share is the compliance to Sharia principles. These have had to be developed because factoring is essential these days for many businesses in the UK and beyond to help them deal with their cash flow problems.
If you would like to know more about factoring or are considering it for your business then get in touch today and speak to an independent factoring broker who can answer all your questions and give you independent advice.
Factoring Solutions is one of oldest established specialist factoring brokers and is available on 01827 707680
Factoring is one of the most popular and most effective ways of easing cash flow worries with businesses across the UK enjoying its many benefits. But there is still a lot of misinformation out there about factoring which means many businesses are unaware just how useful if can be. Here’s 5 things you may not know about factoring:
Factoring Is Not a Loan
One of the main misconceptions is that factoring is a loan as well as one that is somehow more expensive than traditional bank loans. This is completely incorrect because factoring is not a loan in any sense of the term. There is absolutely no lending involved whatsoever in factoring. When a factoring company buys your invoice and pays you money for it, that is it, that is the sale done and dusted, your business owes nothing to anyone. The responsibility for collecting the money owed on that invoice now stands entirely with the factoring company. Therefore, factoring is not a loan, it’s actually a straightforward sales transaction.
It’s Not YOUR Credit Rating That Matters, It’s Your Customers
One of the most common reasons that some small business owners cite about not using factoring as a way of solving their cash flow woes is that they are worried that they do not have the credit worthiness to benefit from it. The irony is, it’s for small businesses who may not have the best credit and startups that factoring can be a fantastic way of improving their cash flow. This is because factoring is based upon the creditworthiness of a business’s customers, rather than the business’s credit score itself. This means that if your business has some very credit worthy customers, factoring is fantastically quick, simple and cost effective method of improving cash flow.
Compared to Lending From A Bank, It’s Seriously Quick
Is invoice factoring quicker than a bank loan? Yes. We all know that thanks to the current economic climate, getting funding from banks can be a long, drawn out affair. With loan decisions being taken on various factors including a company’s operating history and credit scores, it can sometimes take weeks or even longer. Factoring can be done much quicker than this, often within a matter of days if needed.
Factoring Can Save You Serious Amounts of Time
If you factor your sales invoices then effectively the factoring company is running your sales ledger. Think about the resources and time that your business currently takes issuing and cashing up invoices? There may be a charge for factoring but when you factor in the time saved and the resources saved (which can be deployed elsewhere) then you will often find that their is a net saving by using factoring for your business.
More Businesses Than You Think Use Factoring
You’d be surprised at just how many businesses use invoice factoring as currently over 44,000 UK companies are using either factoring or invoice discounting to fund their working capital.
Chances are that are many of your customers, clients and competitors are benefiting from invoice finance so why not contact Factoring Solutions today on 01827 707680 to find out how factoring can benefit your business happy in the knowledge that all of our services and advice are, and always will be, completely free of charge
If you’re running a small to medium sized business then you’ll undoubtedly be aware that one of the key challenges is maintaining a healthy cashflow. Having control of the money coming into your business and what goes out of it is essential to helping your business thrive and if your cashflow struggles, it can have several negative effects on your business including:
● Unable to settle invoices and owed monies: Poor cash flow management can result in you being unable to pay suppliers and even your staff
● Harm your credit rating: Frequently defaulting on short and long term financial obligations can in certain circumstances harm your company’s credit rating
● Diminish your competitive advantage: Poor cash flow can harm the competitiveness of your business because you are unable to finance the required investment needed to keep your competitive edge over rivals. This could be investment in new tech for example.
● Most importantly, it can threaten the very existence of your business. If your business cannot pay suppliers and creditors, it won’t be very long before the company’s insolvency results in closure.
It is clear to see that poor cash flow can kill a business and it is time to consider invoice factoring if you are experiencing any of the following:
● Are you a startup business that is struggling to get finance from the existing traditional sources of finance such as banks?
● Are you experienced an increase of slow paying customers or clients and is thus negatively affecting your monthly cash flow?
● Does your business have a long sales cycle? Does a slight dip in sales or a delay have a serious impact on your cash flow?
● Is your business sometimes struggling to find the money to invest in its growth, such as paying for new equipment and training?
● More worryingly, are you sometimes struggling to find the money for your company’s payroll?
If you are experiencing any of these then it’s time to consider invoice finance. However, it is wise to proceed with caution. A Quick Google and you will find a whole host of factoring companies out there, all offering what they say are the very best deals on the market. However, all is not what it seems because what may be a good deal for one company may not be good for another. There may be other charges involved and what on the surface may seem like a great deal can turn out to be a very expensive mistake. In view of this, it is always advised to go through a factoring broker. Independent from the companies involved, a factoring broker can explain what deals are available, highlight any hidden charges and ensure you get the best deal for your business. And the best news? As well as independent advice, you may even get a better deal because often factoring brokers have access to better deals than are available to the public.
If you’re considering invoice factoring then why not give us a call today? As independent factoring brokers, we have helped improve the cashflow of many businesses across the UK. Call us on 01827 707680
Are you an SME or startup and would like a way to ease those occasional cash flow woes? Maybe you have heard about invoice discounting but have never really considered it because you weren’t too sure what it is? Here we take a look at 5 things you probably don’t know bout invoice discounting and how it could help your business.
It’s Not Invoice Factoring
One of the big misconceptions about invoice discounting is that it exactly the same as invoice factoring. It isn’t. Although in many ways they are very, very similar, there are some fundamental differences around who runs the sales ledger and collects the money as well as whether your customers will know you are using these kinds of services. We’ll explore these below.
Your Business Retains Control Over Your Own Sales Ledger
With factoring, you sell your invoice to the factoring company and they take the role of managing the sales ledger, credit control and chasing customers for the payment of the invoices. This is not quite how invoice discounting works. With invoice discounting, your business retains control of its own sales ledger and chases payment in the normal way.
Your Customers Won’t Know You Are Using Invoice Discounting
With invoice factoring, it is clear to your customers and clients that you are using invoice finance because the factoring company are the ones collecting the payments. Some companies don’t like this fact about invoice factoring, despite it being a common occurrence and something that because so many customers are using, it hardly raises an eyebrow. However, with invoice discounting, no-one will know that you are using these types of services because you are collecting your own payments.
It’s Much Quicker Than Traditional Bank Finance
If you are a startup (or indeed any small to medium sized business) then you’ll know that if you try and access traditional bank finance then it can be a very long, drawn out and frustrating process that often requires you to jump through hoops. More so, it can also often be a very negative experience despite everything you do, you will be denied finance for the very flimsiest of reasons. However, like invoice factoring, invoice discounting is much easier to access for startups and small businesses and much quicker too. This quick access to finance can sometimes the difference between whether a business survives or goes to the wall.
Invoice Discounting is a Source of Finance That Grows As You Grow
The great thing about invoice discounting is that as your business’s level of turnover increases and the value of your outstanding debtors grows, this also entitles you to access more cash through invoice discounting. That means not only can invoice discounting ease cash flow worries in the short term, it can help provide that boost to your business and help it to grow in the long term too. It’s very comforting to know you have a readily available line of finance ready and waiting for when you need it. Whether It’s for research and development or purchasing new tech that will differentiate you from the competition, with invoice discounting you can have access to a growing amount of finance when you need it.
For an informal chat on invoice discounting please contact us on 01827 707680 without any obligation whatsoever. We’ll discuss the various options open to you safe in the knowledge that we will only ever introduce you to one of the few discounters that perform as well as they claim and as one of the UK’s leading specialist brokers all of our services are completely free of charge
Regardless of what industry you work in, life as a contractor can be immensely rewarding, fulfilling but also tough at times. It’s not hard to see the appeal of becoming a contractor, the freedom and financial gains can be significant, as can the flexibility to work where you want, when you want. However, as with many things in life, things aren’t always as straightforward as they seem. Cash flow can be a big problem for some contractors due to a number of reasons including:
● Labour intensive work
● Payments being made to suppliers or subcontractors before receiving cash payments from the project in question
● Slow payers
A poor cash flow can seriously harm you financially and even wipe you out completely so it is important to have a strategy to deal with the inevitable contractor cash flow problems so you can work and make more money with the peace of mind you will always have access to cash.
Why Factoring For Contractors Makes Sense
Factoring for small businesses has for a long time been an accepted, convenient and cost effective way of improving their cash flow by accessing the cash tied-up with their invoices. This can enable the to pay their suppliers and staff on time even if their clients have not paid them on-time. This is done by the factoring company buying the debt of the businesses for a slightly lesser amount than the invoices value. The business may receive a little bit less than they invoiced but what is important for cash flow is that they receive the money straight away instead of having to wait 30, 60 or in some cases 90 days.
Contractor factoring goes one step further and gives you access to the cash that is tied up in your timesheets. For just a small percentage of the cash tied up in your timesheets, you could have them paid into your account within as little as 24 hours.
3 Situations In Which You Might Need Contractor Factoring
Transitioning From Umbrella to PAYE or Limited Company – Undertaking this sort of transfer can sometimes stretch you financially depending upon your personal financial situation. You could be waiting up to nine weeks for the payment of your first invoice which can be an awfully long time without money! Using factoring however will let you access the money with every approved timesheet.
Cash For Equipment Or Training – If you need a lump sum quickly to invest in new equipment or training, then factoring is the perfect solution. Within a day, you can have access to the cash you need to get the training or equipment that is essential to your work.
Short Term Cash Flow – Sometimes as a contractor you can face short term cash flow problems for a whole range of reasons. Factoring is the perfect solution to get you across these short term cash flow worries.
If you want to know more about factoring and how it can help you then call your independent factoring broker on 01827 707680 for a free, no obligation chat.
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Factoring is one of the easiest and most effective ways of accessing finance for your business. However, even though it is more and more difficult to access more conventional types of finance through institutions such as banks, many companies still have not considered factoring as the answer to their cashflow worries and business growth plans.
One of the sticking points is often not understanding how factoring companies charge for their services. This is understandable but the fact is factoring is a really easy process and everything is very transparent and clear once you understand what is going on.
The factoring fee
Factoring companies charge for their services with their factoring fee. This is a % of the amount of invoices that you require factored. The exact rate of the factoring fee depends upon a number of things:
● The industry you are in – Some industries are generally more creditworthy than other which can lead to some industries getting preferential factoring rates.
● The volume of invoices you require factoring – The more invoices you require factoring, the lesser the fee you will generally pay.
● The factoring company you use – Different factoring companies have a range of different factoring charges.
● The terms of your invoice – The length of time your customers have to pay will affect the rate you are charged.
● How creditworthy your customers are – The better their credit rating, the better the overall fee.
As a guide the typical SME may be looking at a service fee of between 0.5% and 2.5% of factored invoices plus interest on the funds advanced at something like 2.5% to 3% over Base Rate. To get the very best terms for your factoring though, you should really use the services of a factoring broker as you’ll get the best terms for your business and won’t pay anything extra.
The reserve amount
Something that many people don’t understand about factoring is the reserve amount. When an invoice is factored, your business receives a % of that invoice straight away, let’s say in this instance it is 90%. The remaining 10% is kept as a reserve to cover factoring fees and as a buffer against any bad debts. Once the invoice is paid by your client to the factoring company, this, minus the factoring fee is returned to you.
Are there any other fees involved?
There can be, which is why it is wise to use a broker who can navigate you through the different options available. Some companies charge an application fee for example and some may charge for bank transfers and other things. Sometimes there can be so many factors and fees to consider, it can be difficult to pinpoint which is exactly the best deal for you which is why it is essential to take expert advice to get the best deal possible for your company.
If you would like to know more about factoring and how it could help your business then don’t hesitate to contact Factoring Solutions for a free, no obligation chat on 01827 707680