Invoice factoring is a way to raise cash flow. You do so by selling your unpaid invoices to a third party in return for a percentage of the invoices’ value. This can be a big help when it comes to keeping your cash flow liquid and reducing the time you spend waiting for funds to arrive.
Many banks and financial institutions offer invoice factoring schemes, as will some specialist private organisations.
When you opt for invoice factoring you allow a finance manager to look after your sales ledger. They essentially buy the money you are owed and then set about actively collecting the full amount from your customers.
As an alternative to invoice factoring, you can also consider invoice discounting. With discounting, rather than handing your invoices over to a third party you take out a loan against the value of your unpaid invoices.
You and your business are still responsible for collecting the money you are owed, but you usually don’t need to repay the loan until you have received payment on your invoices. Once you receive payment you pay back the loan plus fees and interest.
Some organisations prefer to opt for invoice discounting rather than factoring, as it means your customers do not need to know that you have involved a third party in debt collection. They will not be contacted by a third party on your behalf in order to recover the debt.
In simple terms, it helps you keep your assets liquid. When you have more cash in your business account you can invest in growth and development.
As your business grows and the number of invoices you send out grows, so will the amount of money you will be able to secure through invoice factoring.
Since the recession many banks prefer to lend money against invoices than to offer overdraughts or unsecured loans, so you may have a better chance of raising capital if you consider these options.
Funds from factoring and discounting are often quick to arrive in your account too.
Invoice factoring can be very useful in any situation where you find yourself in need of extra capital that is fast and secure. It can be a great asset when: