Factoring and Invoice Discounting are two very similar things.  The main difference between the two however is that Invoice Discounting allows you to keep control of your sales ledger.

So what is Factoring?

As a company you might have taken on a big job, but then suddenly realised that you don’t have the funds that are needed to supply your product or service.  Obviously that is very frustrating.

What Debt Factoring does for your business is it enables you to raise finance off the back of invoices that you issue to your clients.  The company lending you the money can see that you are due to be paid a certain amount and they will often lend you a proportion of that amount before you are paid by your creditors.

It’s a simply solution that works very well for many businesses.  Payment can be made within 24 hours and generally up to 85% of the valiue of your invoices.

Improves your cash flow

If you are in business you will know that cash flow is extremely important.  If you don’t have a strong, positive cash flow you could find your business gets into financial trouble quickly.  Factoring helps solve those problems.

Let’s say your business has had a great quarter and made lots of sales, you could still find yourself in difficulties.  Invoices won’t be due to be paid until a set time in the future and even then that is often delayed.  If your cash flow is poor you could still be struggling.  Factoring is a fantastic solution for businesses in this situation.

Complicated

The agreements between you and Factoring lenders can often be complex.  To avoid any issues it is often advisable to get a solicitor involved to make sure you don’t make any bad decisions and sign any agreements that aren’t right for your business.

Freeing up your Sales Ledger

Depending upon how you look at it and how you run your business, freeing up your Sales Ledger could be very useful to you.  Essentially, Factoring gives you this opportunity.  By outsourcing your Sales Ledger you might then be free to run aspects of your business that need more attention.

Never enter into a Factoring greement without thinking carefully about whether it is the right thing for your business to be getting into at that time.  Do you desperately need to improve your cash flow? Do you really need more money to finance business purchases?  Could you get by without a loan until your invoices are paid?

Remember you will have to pay interest on your loan and this could be fairly high depending on the risk you pose to the lenders.

As companies look for ways to generate cash in an economy that is making it increasingly difficult to keep their doors open and get by based on the revenues from service or product sales alone, it is important that they be aware of every available option to raise capital. Many businesses mistakenly believe that debt is their only option. As a result, they go from bank to bank hoping to be loaned money.

This may be a viable option for some companies. However, it isn’t one for every company and for a variety of reasons. Some businesses simply haven’t been around long enough for them to be given serious consideration by a banking institution. Others don’t have stellar credit, which takes them out of the running for most bank loans.

Business loans have always been pretty challenging to obtain. However, they are even more difficult to qualify for today. One great alternative is invoice discounting, which we will discuss in more depth below.

Invoice discounting can be an excellent way for a business to generate capital. As long as a company’s customers have good credit, it will be possible for them to work out a deal with a Factor. A Factor will purchase businesses’ invoices for a discounted price. This typically is within the 70% to 85% range. For example, a £1,000,000 invoice may be purchased for £850,000.

After the purchase, the Factor will begin the collection process. All payment arrangements will stay the same. If an invoice is due in 30 days, and has not been paid within that time, the Factor may then begin sending letters to the client and making phone calls if necessary.

After they have collected the money, they will then return any amount over and above the discounted price, to the company they purchased the invoices from. They will in turn, be paid a fee for their service. This fee will be dependent on the Factor, the age of the invoice and their ability to collect on the invoices.

Invoice factoring can be a fantastic way for businesses that invoice their clients to generate capital. Instead of having to wait until these invoices are due, they are able to be paid right away for them. This can help improve cash flow problems and provide businesses with much needed monies.

The process is typically a short one, not taking more then one week in most cases, though once a business has established a relationship with a Factor, they are often able to get cash even faster, many times in only 1-2 days. This makes a Factoring company an incredible resources for businesses that might need access to money extremely fast.