Invoice Factoring allows cash to be borrowed against existing invoices. Cash can be accessed immediately rather than waiting for invoice payment.
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What is Invoice Factoring?
Invoice Factoring makes cash available to a company based on the value of invoices raised. When a valid invoice is raised credit is immediately made available rather than having to waiting for client payment.
Up to 80% of the value of a valid invoice can be made available using factoring. This can be useful if a company has been forced to accept long payment terms by its customers.
The process normally involves a factoring company taking over the invoicing and credit control functions. The name of the factoring company must be stated on the invoice. The payment of the invoice is made directly to the factoring company.
What does Invoice Factoring cost?
It is important to understand the cost of Invoice Factoring and Discounting. Normally there will be a service charge. This may be between 0.5% and 1% of the sum lent. In addition interest will be charged on the outstanding loan.
Because less work is being carried out by the Factoring company Invoice Discounting is normally cheaper than Factoring. However a smaller percentage of each outstanding invoice is made available.
In addition to the standard charges Directors personal guarantees will usually be required. If a company finds itself in a position where it is unable to repay the money lent the Directors will then be liable for any shortfall.
Is Invoice Factoring suitable for your business?
Invoice Factoring provides a credit facility based on current business activity. The facility can only be made available if the company has been trading for some time is already generating invoices.
Invoice Factoring could be used in a Pre Pack solution. In this situation a new company is set up and is able to start trading immediately in place of the old. As such invoices will start to be raised almost immediately.
The different facilities may be used depending on the nature of the business. Where it is important to ensure that the involvement of a factor is not disclosed invoice discounting may be appropriate. Where this does not matter full factoring may be the correct solution. Factoring can sometimes be an advantage if third party help with the collection of debts is required.