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Incisive Business Guide to Factoring

Incisive Business Guide to Factoring

This guide from Incisive Business outlines the features and benefits for your business from using factoring and invoice discounting services.

Factoring is commonly used by businesses to improve cash-flow but can also be used to reduce administration overheads.  Factoring is a flexible source of finance where no other assets are needed to secure the funding.  Your business sells it's accounts receivable and the factoring company collects payments directly from your customers.

With Invoice Discounting you sell your accounts receivable without the knowledge of your customers and the credit control and management remains your responsibility.

How can Factoring benefit your business?

  • Factoring provides payment certainty. You know when you are going to paid instead of having the insecurity of waiting
  • When you use a factoring service you receive a quick cash injection into your business in line with your revenue
  • By factoring you could receive up to 90% of the value of your invoices within 24 hours
  • Factoring is well priced compare to other sources of business finance and loans
  • The company that provided your factoring service will manage and collect your debts on your behalf freeing your time to manage your business.

So what is Factoring?

Factoring is finance based on the value of the sales invoices you issue to your customers.  Basically factoring involves selling your invoices to a third party.

For any organisation cash is king and having a healthy cash-flow is the lifeblood of a business.  Factoring is commonly used by businesses to improve cash-flow but can also be used to reduce administration overheads.  Factoring provides a regular cash input into your business and means that you concentrate on growing your business not spending time chasing payment from your customers.

Factoring is a flexible source of finance in that the amount a business can borrow grows with their sales.  This flexibility is often essential to allow companies to fund growth. Additionally with factoring no other assets are needed to secure the funding - your invoices and the "promise to pay" are the asset.

Also known as Invoice Discounting, Debt Financing, Debtor Financing and Asset Based Lending or ABL, factoring is ideal for business-to-business companies that offer goods or services on credit terms i.e. 30, 60 or 90 days.

A factoring company will lend your business an agreed percentage based on the invoices you issue to your customers.  The factoring company will then collect the invoice when it's due and subsequently pay the balance back to you.  There are usually two charges for this service, which are usually interest and fees.   Interest will be based on the amount advanced and fees are for credit management and administration.

The amount of finance a factoring company will provide against the security of your invoices will vary depending on the company's credit status; however it's usually possible to get up to 85% of the value of the invoices and more depending on your business circumstances.  The finance provided through factoring helps you to ensure sufficient working capital to meet cash flow requirements; pay suppliers etc which in turn, will help your business continue to grow.

Today Factoring is popular as an alternative to more traditional methods of maintaining cash flow.  In the past companies would rely on banks for small business loans or overdraft facilities or perhaps even used their business credit cards to help pay for materials or even staff wages.  Factoring helps to bridge the gap between the time you issue of an invoice and the point at which you receive payment.  Also the more invoices you raise, the more case will be made available to your business by the factoring company.

Please remember it is important to make sure you have the right type of facility for your business and the right factoring company for you.  Different lenders have very different criteria, approaches and capabilities. Choose carefully and research all the associated costs.

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