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Invoice Factoring - Invoice Finance

Invoice Factoring Facilities

Invoice Factoring - What Is It

Invoice Factoring, also known as invoice finance, is performed where a business sells its invoices to a third party, usually the factoring company or factor.  The factor will review the invoices and then permit your business to draw down against the value of the invoices you've submitted i.e against the money owed to you by your customers.  Using a factoring service will provide robust debt collection services and sales ledger management for your business, which in turn improves your cash flow and this means your business is in a better position to manage its own debts as well.

Another way to look at factoring is to see it as a short term loan.  Invoice factoring can provide access to funds for companies that have previously found finance difficult to obtain, perhaps where the business is too young or there's a lack of security.

How Does Invoice Factoring Work?

You send your invoices to your factoring company and they will make funds available normally within 24 hours and up to 85-90% of the value of the invoice.  When the invoice is subsequently paid by your customer any remaining amounts are repaid less any agreed finance charges.

The factoring company will send out invoices, reminders and statements on your behalf having agreed the process with you beforehand, but you keep control of the sales ledgers.  The factoring companies will also offer credit insurance and other support products and services.

Factoring is available to commercial companies that invoice other businesses on credit terms and the amount of money available are often greater than you could borrow through other bank related products and also the funds available grow as your turnover develops.

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Introducing Factoring To Your Business

There are a range of invoice factoring companies, from independent finance businesses to well-known bank brands. To get your finance started the factoring company will firstly, want to meet you - to understand your business objectives and how your business operates.  Before you can start factoring your invoices they will also need to review your finances, your customers etc to make sure your business is suited to invoice finance.

When you are considering invoice finance arrangements always look at the terms and conditions.  Check the amount of notice you have to provide if at any point you wished to stop the service.  It is common for factoring to require at least three month notice, but sometimes this can be longer.  You may want to take independent legal advice before signing any factoring agreement especially if this is the first time you have used this type of service.  You will find once a factoring company has approved you that there are opportunities to negotiate and taking advice may indicate such openings.

Invoice finance agreements usually have two elements to their charges.  Firstly you will be charged a fee when the factoring company receives an invoice from you.  Secondly there'll be a charged based on the amount of funds provided and the length of time it remains unpaid. Often known as the discount charge this is due on a monthly basis.

Pro's and Con's of Factoring

Invoice factoring provides a cost effective way of managing your sales ledger.  The factoring company will have information to hand regarding the credit worthiness of your customers and potential customers, allowing you to make more informed decisions about who you trade with and on what terms. (Invoice Factoring Benefits)

However the cost of a factoring service will reduce your margins as well as your potential for using other lending products and services.  Additionally the credit collection services of the invoice factoring company to your customers will make an impression on your customers and subsequently influence your reputation.  You will, therefore, need to assure yourself that the factoring company you choose fits your needs and matches your philosophies.   Be aware that, should you wish to end your factoring arrangement you will be required to pay back monies that have been advanced even if your customers haven't paid yet.

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