When faced with a factoring service contract for the first time, you may find it complicated. In fact the idea of invoice finance is really simple.
Factoring is a financial facility that 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 providers 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 businesses capitalise on their future cash today. It is a very easy way of improving the cash flow of your concern and connecting the cash flow gap established when selling to another concern on credit terms. Factoring is akin 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 facet to the facility. The corporation simply becomes the delegate for amassing in the funds on behalf of the financier.
Invoice discounting can be disclosed to the purchasers or confidential, enabling you to go about your day to day exercise without any assumptions as far as your client’s viewpoint goes and without any impact on the good relationships you have built.
What exactly can factoring do for your enterprise?
Most companies trade on credit terms, so when services and or products are checked in and the relevant invoice raised, there is a duration of time (in the main 30-90 days) before payment is received from your client. There are a few solutions to assist you in trading and expanding your business.
A Bank loan or overdraft is not the supreme way of financing a developing business. Overdrafts can be recalled at anytime and are not often granted at the suitable level to allow you to optimize your concern. In addition, often personal security is required. The best (well I think the best but I am biased) cash flow solutions are invoice finance.
The Factoring/Invoice Discounting enterprise 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 customer 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 legitimate 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 company, 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 clientele, where you have a designated protection limit in place.
You’ve signed up with a factoring company. Where to from here?
When you invoice a purchaser, you send an electronic copy of each invoice to your factor. The factor advances you the agreed percentage of that invoice. The factor is then responsible to collect the money from your customer. 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, rendered for running the ledger, collection liveliness and monitoring and a Discount Fee, which is levied over base rate, routinely 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 clients.
- When you need to finance the extension 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 that’s left for you to do is consider the benefits and decide if Factoring or Invoice Discounting could be the solution to support the expansion of your business.