When faced with a factoring service contract for the first time, you could find it complex.

In fact the concept of invoice finance is really simple. Factoring is a financial facility that allows your company to get paid on the invoices pretty much as soon as they have been issued. The facility effectively allows small or medium sized providers to change 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 earnings today.

It is a very easy way of developing the cash flow of your concern and cutting across the cash flow gap created when selling to another company on credit terms. Factoring is reciprocal to invoice discounting or debtor finance. The important difference is that with factoring, the financier runs the ledger, whilst with invoice discounting or debtor finance there is no credit control aspect to the facility. The business simply becomes the intermediary for aggregating in the funds on behalf of the financier. Invoice discounting can be disclosed to the clientele or inside, enabling you to go about your day to day bustle without any connotations as far as your customer's perception goes and without any impact on the good relationships you have built. What exactly can factoring do for your corporation? Most companies trade on credit terms, so when services and or products are expressed and the relevant invoice raised, there is a period of time (commonly 30-90 days) before payment is received from your clientele. There are a few solutions to assist you in trading and amplifying your business.

A Bank loan or overdraft is not the supreme way of financing a growing business. Overdrafts can be recalled at anytime and are not often granted at the fitting level to alow you to optimize your enterprise. In addition, often personal security is required. The best cash flow solution is invoice finance. The factoring/Invoice Discounting enterprise 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 90 days from the invoice date. Once your purchaser 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 suitable solution for your business comes down to what your enterprise'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 client, 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 which invoice. The factor is then responsible to collect the money from your client. 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 most often broken down into two: Service fee, charged for running the ledger, collection hustle and monitoring and a Discount Fee, which is rendered over base rate, mostly 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 which 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 evolution 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 which's left for you to do is consider the benefits and decide if factoring or Invoice Discounting could be the solution to foster the growth of your business.