Invoice Factoring – a business consideration


 

In today’s climate getting the sale is one thing but getting paid for your invoices can be a struggle to say the least! Growing businesses can be struck by cashflow issues. If your business is new lines of credit may not be established yet and this can lead to problems when you want to grow but can’t pay your suppliers. Getting a bank loan or setting up an overdraft facility might not be the route you wish to take. Money from previous sales not hitting your bank in time to pay your suppliers for new stock in order to fulfil future orders can constrict your business so let’s look at the advantages and the steps to consider in factoring your invoices.

What is invoice factoring?

Invoice factoring has been around for some time now and in essence allows you as a company to sell your invoices to a finance company. They in turn pay for the invoices giving you immediate funds. This then enables you to run you business and gives you a far more favourable cashflow. Another advantage of factoring is that invariably this can be setup quickly.

If you’re a small to medium size company this can be an excellent option for you to consider as the process can also allow you to off load the debt collection which can be time consuming especially if you’re the one selling and then having to make the call when the customer doesn’t pay in time.

How does it work?

An invoice is created by you for your customer with the factoring company’s bank details listed instructing your customer to pay them direct. A copy of the invoice is also sent out to the factoring company. The factoring company will then pay pretty much immediately the agreed percentage of the invoice, leaving the balance to be paid to you once received by the factoring company less charges.

For example, you raise an invoice for £15,000 and send this out to your customer with payment terms of say 30 days from invoice date. A copy of the invoice also going to the factoring company. The factoring company pay you 80% immediately so you receive £12,000. The customer then pays the full invoice to the factoring company within the credit terms and the factoring company then send you the balance and deduct their charge.

Is it the right option for your business?

On a positive note for factoring, knowing that a large amount of these funds will be hitting your bank account early enables you to plan and budget financial events that take place within your company.

There’s a lot of factoring companies out there so competition keeps their charges at an acceptable rate and gives you the ability to shop around. Also, the debt collection is dealt with by them so no need to employ someone to do this or add to your responsibilities!

 A fee is charged for every invoice along with interest so it’s always good to check the small print and if your clients take a long time to pay this will cost you in charges. If you have clients that take ages to pay and extend the payment terms you have set them this will still cost your business money and if the invoice runs into bad debt territory the amount paid by the factoring company will need to be returned.

So, a lot to consider but definitely worth a look as a lot of businesses function very well using this option.

Comments

Post a Comment

Popular posts from this blog

Artificial Intelligence in Corporate Financial Operations

Image
In the information age,  artificial intelligence  has established itself as one of the most revolutionary forces, transforming industries and ways of life.  In particular, the financial sector, always seeking precision, efficiency and innovation, has embraced AI with enthusiasm and high expectations.  This guide explores  how AI is redefining the financial landscape , providing unprecedented opportunities and presenting unique challenges.   AI, with its capabilities in  machine learning ,  predictive analytics , and  processing large amounts of data , has found fertile ground in the financial sector.  On the one hand, it has the potential to  optimize existing operations , making processes faster and more accurate.  On the other hand, it paves the way for  new strategies and services , which until recently were considered impossible.   Finance , traditionally an industry driven by numbers and data, now finds itself  at  the centre of an AI-driven revolution .  This technology not only 
Read more

How interest rates affect us

Image
  If you are a follower of the economic press, one of items of news that has had more impact these days is the decision by the monetary authorities of both the United States and Europe to reduce the interest rate of money or announce future reductions in their respective areas of action. The question is, do these movements of high economic spheres really affect ordinary citizens? Do they have an influence on our day-to-day economy? The answer, although we don’t believe it, is yes, especially if we are small entrepreneurs. How changes in interest rates affect us When a Central Bank lowers the interest rate of money, what it is doing is lowering the price of money. Because, indeed, money has a price, the interest that central banks charge to commercial banks for lending them money. And yes, commercial banks are the ones who lend money to us. We start to see the relationship, right? A reduction in interest rates of money what it does is to encourage banks to lend money more easily, less i
Read more