Factoring And Invoice Finance Demystified

When faced with a factoring service contract for the first time, you may find it complicated. In fact the concept of invoice finance is quite 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 companies to turn 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 income today. It is a very easy way of improving the cash flow of your company and bridging the cash flow gap created when selling to another business on credit terms.

Factoring is similar to invoice discounting. The key difference is that with factoring, the financier runs the ledger, whilst with invoice discounting there is no credit control element to the facility. The business simply becomes the agent foe collecting in the funds on behalf of the financier. Invoice discounting can be disclosed to the customers or confidential, enabling you to go about your day to day activity without any implications as par as your customer’s perception goes and without any impact on the good relationships you have built.

What exactly can factoring do for your business?

Most businesses trade on credit terms, so when services and or products are delivered and the relevant invoice raised, there is a period of time (usually 30-90 days) before payment is received from your customer. There are a few solutions to assist you in trading and growing your business.

A Bank loan or overdraft is not the ideal way of financing a growing business. Overdrafts can be recalled at anytime and are not often granted at the right level to aloe you to optimize your business. In addition, often personal security is required.

The best cash flow solutions is invoice finance. The factoring/Invoice Discounting company 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 120 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 right solution for your business comes down to what your business’s specific requirements are. If it is particularly important to outsource the sales ledger management aspect of your business, 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 customer, where you have a designated protection limit in place.

You’ve signed up with a factoring company. Now what?

When you invoice a customer, you send an electronic copy of that 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 customer, it will pay you the rest of the money, minus the fees. Fees are usually broken down into two: Service fee, charged for running the ledger, collection activity and monitoring and a Discount Fee, which is charged over base rate, usually 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 customers.

- When you need to finance the growth of your turnover

- When you foresee an increase in sales and you want to be able to take advantage of it.

- When you simply don’t want to get involved with anything other than what you do best, that 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 speed up the growth of your business.

Iulia Pascanu -