Should You Obtain A Factoring Facility?
Lots of people would find a factoring service contract difficult to decipher the first time they set eyes on it. Actually, the concept of invoice finance is really not that complicated at all. The basic premise of factoring is to act as a financial facility to enable your company to receive payments on invoices just about as soon as they are sent.
What this means for small or medium sized business operations is that invoices that are slow to pay are transformed into cash. It is a way to assist small businesses to capitalise on any future benefits immediately: it is also referred to as accounts receivable funding. It enables these small businesses to rectify any cash flow problems through covering any cash flow gap when a product or service is sold to another company on the basis of credit. Factoring is akin to invoice discounting or debtor finance.
There is one significant difference between factoring and invoice discounting or debtor finance: the financier is responsible for the accounts with the former, whilst with the latter two, there is a lack of credit control. In this case, the business is just an agent for aggregating the funds on the financier’s behalf. Invoice discounting enables the business owner to continue running the business, knowing that their reputation will not be adversely affected.
What is it exactly that factoring is able to offer your company? Keep in mind that when businesses operate on credit terms, there can often be a time lapse of between 30 and 90 days from when an invoice is presented to when any payment is made. There are ways to deal with this dilemma: you may choose to establish a bank loan or overdraft, but this is not the most efficient way to finance a company. An overdraft can be called in at any time and they are often not large enough to meet the needs of a growing business. Loans require personal security. Invoice finance is the best solution to any cash flow problems your business may have.
How does it work? When goods or services are delivered and invoices are generated, the factoring or invoice discounting business will fund the invoice: the amount funded is usually up to 90% of the value of the invoice. These invoices are most often financed for a period of up to 90 days. When the outstanding amount is paid by the purchaser, you will then be given the percentage that has not been paid against the invoice, minus any charges. These charges will vary depending upon the type of facility and service level you choose.
Whichever solution you choose will depend upon the specific needs of your business. If you find it convenient to outsource the accountancy of your business, then a factoring facility may be beneficial as it will allow your company extra time and reduce the number of days you are in debt. Some factoring companies can also provide bad debt protection. This usually covers up to 90% of an outstanding balance so long as you have agreed upon a specific protection limit.
What happens when you have entered into an agreement with a factoring company? When you invoice a customer you should send an electronic copy of that invoice to your factor, upon which they will advance to you the agreed percentage of the invoice. It is then the task of the factor to collect outstanding monies from the customer and when they have received this payment, they will pay you the balance of the funds, less any fees. These fees can be placed into two categories: a service fee for the accountancy and a discount fee, charged over base rate most likely on a daily basis on any outstanding balance. Any company that is reliant upon timely payment of outstanding invoices will certainly benefit from using the services of a factoring company.
What indicators may give you the impression that your business needs the services of a factoring facility? * when the business is newly established and reliant upon cash flow. * when the business does not only rely upon a few major clients. * when you are looking to increase the business turnover. * when you are wanting to take advantage of a predicted increase in sales. * when you wish to concentrate entirely on running the business.
These are the bare bones of factoring. It is now up to you to consider the advantages for your business and decide if factoring or invoice discounting would benefit your company.
Recent comments