If you hate chasing debtors and all the paperwork and administration that goes along with it, then invoice factoring is definitely an option to consider.
An invoice factoring company – better known as a factor – will manage your debtors to ensure they are invoiced and pay on time.
As you raise each invoice, the factor will advance up to 80% of its value. You’ll receive the remaining 20% when the invoice is paid.
This ensures you have cash available when you need it, so you can achieve more sales and build your business.
The direct involvement of a third party in the administration of your accounts and the fact that all your customers know about it is the biggest difference between factoring and invoice discounting .
While it is comforting to have someone else do the hard yards in terms of your credit control, the invoice factoring company will be keeping a close eye on how you run your business and it may vary its arrangements with you on short notice.
Most factoring arrangements require that your customers be told that the debts can only be discharged by making payment into the factor’s account.
Factoring requires a long term commitment. You’ll agree to sell all your invoices to a finance company for 12 months and, in some cases, 24 months.
It carries higher fees than invoice discounting because the lender takes responsibility for managing and collecting your invoices.
Best for smaller firms
Invoice factoring tends to work best for smaller businesses because of the collection service and increased credit control. However, invoice factoring companies will expect you to have a minimum turnover and a minimum number of customers.