Due to the credit crisis and the unwillingness of many banks to lend, businesses are struggling to raise money to finance their activities using traditional sources, such as an overdraft, credit card or loan facilities. In response, many companies are turning to sources of income such as factoring and invoice discounting s.
With Factoring and Invoice Discounting, cash flow is improved by borrowing against invoices. Using this service the company is usually able to access 80% of the invoice value immediately without having to wait for the normal pay period. There are three main ways of doing this:
- The Invoice Factoring process usually consists of a bank (usually known as the factoring company) take over the company’s billing and credit control function. The factoring company makes credit available in the higher bills. The name of the factoring company indicated on the invoice and the invoice payment is made directly to the factoring company. Collection and credit control are often administered by the factoring company.
- CHOCCs is synonymous client handles own credit control. This type of factoring is similar to full factoring in this situation however; the company still has the responsibility to collect payments for your bills. It has the advantages that a service will usually be cheaper and control is maintained on the payment relationship with the customers of the company.
- Invoice discounting is similar to factoring in the sense that a factoring company credit made available to the company as soon as an invoice is issued. However, the service is discreet. The name of the factoring company does not appear on the invoice and debtors do not know their participation. The company sends normal bills and debt accumulates in the normal way.
Factoring which option should you use?
This depends on the nature of your business. For example, where it is important to ensure that the participation of a factor which is not revealed, factoring may be a more appropriate method. When this is not important or, indeed, which is seen as an advantage to engage a third party to assist in the collection of debts, complete factoring may be the right solution.
Of course, invoice discounting to be available; the factoring company should be confident that the business is being given to will be able to manage well their debt collection processes. To a solution of full factoring invoice, up to 80% of the value of an invoice may be available the day arises. However, as invoice discounting is perceived as a greater risk to the factoring company, and they have less control, smaller quantities may be available with this solution.
It is important to understand that money invoice factoring is based on the business activity is already happening. Factoring or discount for work, the company should be and generating invoices or imminent generation. As such it is an ideal way to improve business cash flow currently operating. That said, however, discounting or invoice factoring can also be an ideal solution to help improve the cash flow position of a new business as the company Phoenix. Here bills begin to rise almost immediately and thus factoring facility could be used.
Because invoice factoring or focus on improving cash flow discounting, which is generally not a good way to raise a lump sum of a particular business project. If this is your obligation and a bank loan not available, then a better option might be the asset refinance.
Financing of the invoice and the discount is not free. Normally, both options involve a service charge (which can be between 0.5% and 1% of the amount borrowed) and interest rate. However, if a company is looking to improve cash flow and most traditional methods to accomplish this, such as bank overdrafts and credit cards are being withdrawn, the financing of the bill and the discount is often a very useful solution.
Kelly Wilson is an experienced writer who has contributed to a number of notable publications. As a Business & Invoice Factoring expert, she is able to offer advice in various fields, including business.