The In's and Out's of Invoice Factoring

What is Invoice Factoring?

Invoice factoring, or Asset based lending; is when a business sells their invoices to a third party, or factor, in order to fund cash flow.

In the UK, around 45000 businesses use factoring; which is provided by banks, or independent finance providers.

How Does it Work?

An agreement is struck between the business and the factoring company where, for a fixed term (usually about 24 months), the business manages their credit control and sales ledger through the factor. When the business sends an invoice to a customer, the factoring company advances some of the funds upfront - usually between 70-85% - so the business cash flow continues even when the customer hasn't paid.

When the customer does pay, the factoring company collects the debt; takes their fees, and passes the remaining amount to the business.

Most factoring companies include credit insurance in their service. These are called 'Non-recourse' facilities.
In the event of the business's customer going into insolvency, or is otherwise unable to pay; the funds that are tied to the unpaid invoices can be retrieved.

Factoring companies with no credit insurance - 'Recourse' facilities - require the business to pay back any funds the company had already previously advanced, related to the relevant invoices.

Advantages

Businesses that use invoice factoring, find it easier to manage their cash flow.
Factoring companies release funds tied in unpaid invoices, so the business does not have to wait for the customer to pay to receive funds.

Additionally, since most factoring companies also manage credit control; businesses can save time by no longer having to chase customers for invoice payments.

Disadvantages

Contracts with a factor can be expensive, as they tend to be long in duration; and require the business to have their sales ledger funded through the factor during this time.

Additional monthly fees are also common, on top of the initially favourable quotes of rates and fees that factoring companies advertise. Sometimes referred to as 'disbursements,' the extra fees are usually to do with additional 'out of the ordinary' services, such as: credit checks, same-day bank payments, receiving letters etc. This can add to the cost significantly, and makes it a very expensive method of finance.

Many small businesses like to retain their own credit control to maintain healthy, friendly relations with their customers. However, some factoring companies insist on taking credit control in order to pursue customers for payment.

Businesses that only have one or two main customers, are not suitable for invoice factoring facilities, due to factoring companies insisting on 'low concentration limits.' This is where the factoring company demands that a only specific percentage of the business's sales ledger can be made of only one single customer.

Conclusion

There are many benefits to invoice factoring that offer a lot of financial help to businesses. However, their advantages are dependent on the type of business and it's size.
Careful consideration must be given in whether invoice factoring is a suitable choice for a business, and that the particular factoring company fulfils all the necessary requirements of the business For details contact a company such as fastinvoicefinance.com for details and a quote..