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Factoring and invoice finance in simple terms

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article image Factoring and invoice finance in simple terms

Also known as accounts receivable financing, this is merely a way of helping small businesses capitalise on their future receipts today. It is a ideally easy way of improving the cash flow of your company and joining the cash flow gap effected when selling to another business on credit terms. Factoring is analogous to invoice discounting or debtor finance. The fundamental difference is that with factoring, the financier runs the ledger, whilst with invoice discounting or debtor finance there is no credit control component to the facility. The corporation simply becomes the intermediary for amassing in the funds on behalf of the financier. Invoice discounting can be disclosed to the clients or inside, enabling you to go about your day to day exertion without any implications as far as your client's recognition goes and without any consequences on the good relationships you have built. 

  What exactly can factoring do for your company?  

Most companies trade on credit terms, so when services and or products are checked in and the relevant invoice raised, there is a measure of time (regularly 30-90 days) before payment is received from your purchaser. There are a few solutions to assist you in trading and enlarging your business. A Bank loan or overdraft is not the classical way of financing a growing business. Overdrafts can be recalled at anytime and are not often granted at the legitimate level to aloe you to optimize your concern. In addition, often personal security is required. The best cash flow solutions is invoice finance. The factoring/Invoice Discounting company will fund your invoices once the goods/services are delivered and the invoices raised. The rate your financier will advance against your invoices can be up to 90%. Invoices are typically financed for 90 days from the invoice date. Once your purchaser pays the outstanding balance, you will then receive the percentage you have not been paid against an invoice less your charges. Charges can vary dependant on the type of facility and the level of service you opt for. The choice of the requisite solution for your business comes down to what] your enterprise's specific requirements are. If it is particularly important to outsource the sales ledger management aspect of your corporation, then you may find it useful to opt for a factoring facility. This will free up some time and assist to reduce your debtor days. An additional service offered by such companies is protection against bad debts, which would typically cover up to 90% of the outstanding balance on any customer, where you have a designated protection limit in place. You've signed up with a factoring company.  

Now what?  

When you invoice a client, you send an electronic copy of that invoice to your factor. The factor advances you the agreed percentage of which invoice. The factor is then responsible to collect the money from your clientele. When the factoring company receives the amount due from the customer, it will pay you the rest of the money, minus the fees. Fees are on the whole broken down into two: Service fee, rendered for running the ledger, collection labour and monitoring and a Discount Fee, which is charged over base rate, more often than not on a daily basis on the outstanding borrowed balance.

Who can benefit from using a factoring company?
Factoring is the best solution for any business that relies on a timely payment of outstanding invoices. The most common indicators that you need a factoring facility are: - When you are a new, cash flow dependant business. - When your business doesn't rely on a small number of major clientele. - When you need to finance the enlargement of your turnover - When you foresee an increase in sales and you want to be capable to take advantage of it. - When you simply don't want to get involved with anything other than what you do best, which is production and sales. Now you have the basics. All which's left for you to do is consider the benefits and decide if factoring or Invoice Discounting could be the solution to speed the advancement of your business.  

More inforamtion on Invoicing and factoring is provided by AR Cash Flow

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