Invoice Financing: Solving Cash Flow Problems With Factoring

Every entrepreneur aims to not only keep the doors of their business open, but also to grow those businesses. One possible solution that will avail working capital that will help a business achieve those goals is for example, factoring. Through invoice factoring, a business is able to extend credit to its customers and still have money at hand to meet its daily running expenses. Read on for more information about factoring and the benefits it offers.

Large amounts of money owed to a business by its customers in form of unpaid invoices can result in serious cash flow problems for the business. By allowing clients a credit period, a business exposes itself to the risk of running out of working capital. To avoid such a scenario, a business can go for invoice factoring, and obtain up to 90% of its invoice debts from another party (factor) almost instantly. Basically, the process involves a factoring company (factor) buying unpaid invoices owned by a business at a discount. In addition, the factor also manages invoices and sales ledgers. As such, all payments from clients are handled by the factoring company. On receiving payments for the invoices, the factoring company takes its share and forwards the rest of the money to the business.

The most obvious advantage of this option is that businesses get access to large amounts of funds quickly. As such, business operations are not interrupted due to lack of money. Businesses can access funds within a very short period of time, sometimes in just 24 hours of invoicing. In addition, both sales and working capital increase at the same time. One less obvious advantage is that businesses get help in management of their sales ledgers. This leaves more time and frees up more personnel to deal with the main activities of the business.

There are also other inherent benefits of using a factor. Firstly, customers may pay up faster when they know that a factoring company is handling the invoices. Secondly, a factor conducts credit checks on the customers on behalf of a business. As a result, a factor filters out customers who are more likely to have a problem making payments.

In some cases, factors can help better the terms between businesses and their suppliers. They also take on the risk of bad debts. In case the client fails to pay up, a business owner does not have to worry about losing that money. However, this is only applicable in non-recourse factoring. This type of factoring is often more expensive than recourse factoring. For the latter, the costs are lower because the business itself takes on the risk of bad debts.

However, factoring has its drawbacks for a business, too. For one, the cost of selling invoices to a factor company will obviously come at a cost for the business. The cost will be between 0.75% and 3% of the business annual turnover. Factoring is also only available to businesses that sell to other businesses.

Businesses must meet a few requirements to enjoy the benefits of this invoice finance option. They must have an annual turnover that exceeds £50,000. However, some factoring companies do consider businesses with a slightly lower turnover. Sales must be well spread out among different customers. No factor will enter into an arrangement with a business that has one customer that accounts for more than a third of its sales. That business must also have a low level of debt.

Another possible invoice finance solution is invoice discounting. It is similar to factoring. However, it is only available to businesses with annual turnovers of over £500,000 and a good track record. The only other main difference is that with this option, customers need not know of the arrangement. Both invoice finance options can help when expanding a business.

When a business sells products or provides services on credit, cash flow issues may arise. Invoice finance offers a quick convenient solution to these cash flow problems. At a small fee, factors will allow businesses to access funds against their invoices. Though it does have a few shortcomings, options like invoice finance can free up cash.

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