Invoice factoring is a form of invoice finance whereby a company sells its unpaid invoices to a third-party factoring company in order to raise funds immediately.
Factoring grants a company instant access to a portion of the value tied up its sales ledger without having to wait for customers to make payment on outstanding invoices; this allows for a more reliable and dependable cash flow situation.
Once you sell your ledger to a factoring company you are not reliant on waiting for customers to make payment on your invoices. Instead, a factoring company will immediately offer a percentage – typically between 70-90% of the total value.
Invoice factoring involves handing over complete control of your invoices to another company as they will be the ones responsible for collecting payment from your debtors going forward. This means that those you issue invoices to will be aware that you have outsourced your collection services to a factoring company. This differs from an alternative form of invoice finance – known as invoice discounting – which allows your company to retain control of its ledger and debt collection processes.
There are pros and cons to retaining control of your debtor book. Some companies do not like the fact that their customers will learn that they have sold their invoices to a finance company. There can be the fear that customers will perceive this as a company experiencing financial problems.
On the other hand, those businesses which do not have an efficient credit control system in place. Chasing up payment from delinquent debtors can end up becoming a tiresome, frustrating, and time-intensive task; invoice discounting can relieve this pressure as well as providing a welcome cash boost.
Factoring is becoming increasingly popular as companies struggle to meet the ever-increasing lending criteria set out by banks and other traditional commercial lenders. Invoice factoring is seen as less risky by potential lenders as they are in control of collecting the money owed by your customers. Their debt collection process will be finely tuned, and they can even commence legal action against those who fail to pay what they owe.
Acceptance for invoice factoring is therefore based more on the assumed risk of your customers and industry, rather than the credit history of your company itself. As long as you have a solid client base who have a good payment history with your company, your chances of acceptance are high.
Invoice factoring does come with fees and charges; this means you will not receive 100% of the value of your invoices, as you will be required to pay the factoring company for their services. However, for many, the stability such a facility can provide to a business is well worth the cost.