Why use invoice factoring?

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.

 

Factoring

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.

Factoring check-list: 

  • When you factor your invoices your client will be contacted by a third-party organisation and will be aware that you have outsourced your invoice collections 
  • Factoring organisations usually pay you around 85% of the value of your unpaid invoices up front 
  • When the factoring organisation has recovered the full amount for your invoices they will make the remaining money available to you, minus their commissions and interest owed 
  • Factoring can be a big help in reducing the administration time you spend on chasing payments

 

Discounting

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.

 

How can invoice factoring help your business?

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.

 

When might you use invoice factoring?

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: 

  • You want to grow or expand your business
  • You find yourself low on capital
  • You lack administrative resources to pursue invoice payments
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