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Factoring and Invoice Discounting Made Simple

Supplier: AR Cash Flow
12 August, 2009

When faced with a factoring service agreement for the first time, you could find it complex. In fact the idea of invoice finance is really simple. Factoring is a financial facility which allows your company to get paid on the invoices almost as soon as they have been issued.

The facility effectively allows small or medium sized companies to transform your invoices, to include slow paying invoices into cash.

Also known as accounts receivable financing, this is merely a way of helping small companies capitalise on their future revenue today. It is a expressly easy way of improving the cash flow of your association and getting across the cash flow gap created when selling to another corporation on credit terms. Factoring is correlative to invoice discounting or debtor finance.

The pivotal difference is that with factoring, the financier runs the register, whilst with invoice discounting or debtor finance there is no credit control part to the facility. The business simply becomes the assistant for compiling in the funds on behalf of the financier. Invoice discounting can be disclosed to the customers or hushed, enabling you to go about your day to day enterprise without any connotations as far as your client's perception goes and without any repercussion on the good relationships you have built.

What exactly can factoring do for your enterprise? Most businesses trade on credit terms, so when services and or products are trucked and the relevant invoice raised, there is a space of time (commonly 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 amplifying business. Overdrafts can be recalled at anytime and are not often granted at the right level to aloe you to optimize your company. In addition, often personal security is required.

The best cash flow solutions is invoice finance. The factoring/Invoice Discounting corporation 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 clientele 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 appropriate solution for your business comes down to what] your corporation's specific requirements are. If it is particularly important to outsource the sales ledger management aspect of your business, 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 additive 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 client.

When the factoring company receives the amount due from the purchaser, it will pay you the rest of the money, minus the fees. Fees are normally broken down into two: Service fee, levied for running the ledger, collection bustle and monitoring and a Discount Fee, which is furnished over base rate, usually 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 which 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 advancement of your turnover - When you foresee an increase in sales and you want to be able 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 that's left for you to do is consider the benefits and decide if factoring or Invoice Discounting could be the solution to travel the evolution of your business.
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