Independent financial advice – factoring and invoice discounting
Independent financial advice can give you more information about factoring and invoice discounting
What is factoring?
Factoring is a flexible form of loan which advances money to a company as it issues new invoices. This is different to overdrafts or more formal loans, which are usually for a fixed amount. Factoring is flexible in that the amount a company can borrow grows with sales. This is often essential to enable companies to fund that growth, since they must usually pay for supplies before they receive payment from customers. Independent financial advice reveals that you will typically be able to borrow around 80% of the value of the invoice.
Factoring and invoice discounting
Factoring companies chase debts for you and pay you a fixed proportion of invoices within a pre-arranged time and the balance of the invoice - minus their charges - once a customer pays up. Charges may be between 0.75 and 2.5 per cent of your company's turnover. Independent financial advice reveals that with invoice discounting you are responsible for chasing the debt but can raise an advance on an invoice. As there is less work involved for the invoice discount company, charges are usually lower.
How does it work?
A factoring company will lend a company a certain percentage of each invoice that it issues, then collect the invoice when it becomes due and pay the balance back to the issuing company. The factoring company charges a fee, usually a very small percentage of the value of each invoice, and interest on the amount of money borrowed. A company must notify all its customers of the new arrangement, and hand over the task of collecting debts to the factoring company. Often at the start of a new factoring relationship, the factor will take on existing debtors.
Independent financial advice reports that invoice discounting is a more basic service. You will retain responsibility for chasing late payment, while the provider will simply advance the money. This facility tends to suit larger companies who have an accounts department.
Advantages of factoring
Factoring can maximise cashflow, and reduce the amount of time and money spent on credit control. Independent financial advice suggests that it can help you to assess the creditworthiness of new and existing clients and can protect you against bad debts. If you do business overseas, it can reduce risk.
Disadvantages
The factor usually takes over your sales ledger, and this could interfere with your personal relationship with customers. This is just one constraint on your business. Independent financial advice warns that some factors may want to pre-approve your customers, which is another constraint that you need to balance against the advantages of factoring.
You can have a brighter financial future. If you would like independent financial advice about bridging loans call our experienced advisers today on 0870 803 1995 or e-mail mike.robertson@mraltd.com
