The In's and Out's of Invoice
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.
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
Additionally, since most factoring companies also manage credit
control; businesses can save time by no longer having to chase
customers for invoice payments.
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.
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..