Fast Payment From Customer Invoices
Invoice factoring is a process whereby an invoice finance company offers payment to a business based on the amount of money owed by its clients. The business may then use the cashflow to cover payroll, purchase necessary supplies and pay overhead expenses such as rent, utilities and other day-to-day costs.
A full-service factoring company may take on the responsibility for collecting customer invoices, including bad or unpaid debt. This may be an advantage for a company that does not have the time or resources to follow up on collection activities, like making phone calls and sending second and third reminders to late-paying customers.
A factoring company may review a customer’s credit ratings, gathering valuable information about clients and potential clients that can help a business make sound financial decisions. Some factoring companies offer protection against bad debt and collection of late or missed payments, depending on the contract with the business.
Invoice Factoring v Invoice Discounting
Invoice factoring usually implies more services offered to the business than in cases of invoice discounting. Factoring companies may have direct contact with the business’ clients, engaging directly in invoice collecting activities, while invoice finance companies deal only with the business, allowing it to collect from its own customers.
In the case of non-notification factoring, the customers are not notified of the relationship between the factoring company and the business. It is important for the business to have a clear understanding of the collection practices of the factoring company, as it may affect future customer relationships. Since the advent of the credit crisis there has been an increase in demand for finance to help with cashflow. This is due to banks tightening credit and late payments from debtors.
Factoring is a way that a company can get monies in quickly to address their cash flow issues. This maybe used when a company is struggling to get in money from customers on credit accounts or who have been issued with invoices but are slow to pay. Slow payment of bills is a large problems many companies hold back payments to increase their cash flow. In extreme cases slow payment of debt can potentially mean that a company will go bankrupt.
The out sourcing of factoring is becoming more popular as it can be seen as potentially an economical way of collecting monies outstanding without having to employ a new member of staff for the task. It is also a way to potentially fund company growth especially if a small company is growing quickly. This means that some business coachs and mentors are recommending it in some circumstances as a good choice. Factoring is normally dealt with banks or private factoring companies.
Reviewed by P Liam on Feb 11
Summary: Why Use Factoring
Description: Factoring used to have a bad name, however now it is regarded as a way to free up cashflow and reduce business overheads at a reasonable rate of interest.