When you take out Factoring cover you’re often doing it to provide your business with some extra protection in the form of cash.

When you Factor your invoices you are making sure that you have the cash when you need it and the Factoring company has the insurance that they have the value of your invoices so they can lend you a certain amount.

Factoring is just utilising your assets to further your business and providing yourself with the insurance of cash when you need it. If you wait a long time for invoices to be paid you always know that you have Factoring to help you out as and when you need it.

There are a lot of businesses that don’t realise the benefit of Factoring. They might think it’s a risky and costly strategy or they might not know enough about it to use it. Unfortunately for these companies they might be missing out on something that could really benefit them.

When companies are faced with a shortage of funds and need a fresh infusion of cash, what’s the quickest and most painless solution available?

Some may say that securing a business loan or line of credit is the best option. Unfortunately business loans and credit lines take time and have interest rates. There’s also the risk of being refused and for businesses that need money now, this is often not the quickest option. In addition, many businesses are already tapped out in terms of credit.

So, what else is there? Well, there’s factoring. What’s factoring and why is it the best option? Factoring is the quickest and surest way to secure financing when businesses need it the most. Unlike a loan or credit line, there is no high interest rate and no issue with making payments.  When you take out Factoring it’s a good idea to an expert as you would when buying insurance where you would speak to a Policy Expert.

How does factoring work and what other benefits are there?

How does factoring work?

Factoring is when a company sells its customer’s unpaid invoices for immediate cash. In return, the factoring company will then proceed to collect on that unpaid invoice.

For instance, let’s assume your company has £10 000 owing on an invoice. The factoring company determines their payout to be 80%. Therefore, your business receives an immediate £ 8000. In return, the factoring company will then go out and collect on the full amount. Once they do, they’ll return the £ 2000, minus their fee.

Why is factoring better than a business loan or line of credit?

Whilst many companies immediately think that loans and credit lines are the solution, it’s fairly obvious why factoring is a better option. There’s no interest rate to be paid and no time waiting for an approval.

There’s no worrying about whether the company will be approved or not. There’s enough stress in business and this is worrisome enough. Finally, the fee is deducted once the final amount is secured. In this case, there’s no upfront payment for the company and no worrying about making any payments.

Factoring reduces the daily cost of money:

Every business knows the impact of the daily cost of money. With business loans and credit lines, this daily cost of money is calculated every day the business borrows that money and doesn’t pay it back.

It’s this daily interest rate that is tied up in the company’s inventory and unpaid invoices. Waiting 90 days to get paid can be an extremely difficult situation for any business. This is no longer a problem when a company decides to use factoring to raise cash.

Factoring allows businesses to pay for their day to day operating costs:

Some companies know they’ll eventually be paid, but simply can’t afford to wait. Day to day operating expenses like salaries, invoices and other bills, need to be paid and keep the business operating.

Because of the current recession, many companies face the difficulty of financing their customer’s unpaid invoices, whilst trying to pay their own bills. Factoring allows companies to draw on immediate cash reserves and still be paid on those outstanding balances.

While these are the most obvious benefits of factoring, there are others. In the worst recession since the Great Depression, businesses everywhere need every tool available. Nobody can ever fault a business for doing everything within its power to remain solvent. Factoring helps businesses remain viable and strong for the future.

What is involved when a company enters into an invoice discounting arrangement with a finance company? More importantly, what is different about invoice discounting when compared to business loans, credit lines and factoring?

There are a couple of inherent differences that come with invoice discounting that might just be what your company needs to improve its liquidity and cash flow position.

Invoice discounting allows businesses to draw on their invoice’s unpaid balances to improve their cash reserves. It allows businesses to access easy funds to continue paying their day to day operating costs.

Cash flow is one of the biggest concerns businesses have today. Invoice discounting allows this to be a problem of the past.

How does invoice discounting differ from factoring?

Whilst factoring is a similar method of raising cash, there are some inherent differences. Factoring is based on selling a portion of the invoice’s value, receiving funds, and then paying a fee once the entire amount has been collected by the finance company.

In the case of invoice discounting, the company doesn’t pay a fee, but instead pays interest on the money it borrows from its receivables. In addition, the company may also pay a monthly fee for the invoice discounting service.

How does invoice discounting differ from business loans and credit lines?

Typically, the financing company will provide anywhere from 70% to 85% of the invoice’s value as a cash advance, and much like a loan, the company will then have to pay interest on the funds it borrows. However, unlike a business loan or credit line, the company uses its invoices as collateral and a form of credit.

It’s also much faster and easier to draw cash from. There’s also less of a risk of being refused. As the company gets paid for its invoices, it can either pay down its balance and interest owing to the finance company, or continue to draw on future invoices. However, it can not exceed the agreed upon payout rate of 70% to 85%.

Invoice discounting is more discrete than factoring:

Whilst factoring is a viable option, there are some drawbacks. The biggest drawback is that the factoring company will be responsible for collecting on invoices. As such, customers will come to know that the business is having cash flow issues.

In the case of invoice discounting, it’s more discrete and allows the company to draw cash without its customers being aware of its cash flow problems. This is likely why some companies prefer invoice discounting over factoring, and find it to be more flexible in the long run.

When companies need cash quickly, and simply can’t afford to wait for approval on loans, invoice discounting is often their best option. Whilst the company does pay interest on the money it borrows, and can pay a monthly fee for the service, overall the benefits are much better than going with the long and drawn out process of applying for additional credit.

Also, for businesses that are at their limit on credit lines and loans, invoice discounting becomes a much easier option to go with.

When companies need access to cash in a hurry, they have but few options. They can apply for a business loan or extension on their business credit line.

However, that takes time and doesn’t guarantee results. There’s also the problem of getting refused and having it negatively impact a company’s credit rating. A bad business credit rating always comes back in the form of higher interest rates. So, if that business loan isn’t an option, what’s next?

Well, thank goodness there’s factoring. Not sure what factoring is and how it can help your business? Read on.

Factoring is not new, has been around for quite a while, is run by professional companies, and is a viable option for businesses needing to address cash flow problems.

Factoring involves a company selling its outstanding invoice to a finance company. In return, the finance company pays for a portion of the invoice’s value and proceeds to collect on the full amount. Once they receive payment for the full value of the invoice, they then provide your business the remaining portion, minus their fee.

Central to using the factoring option is to understand its two variations. There’s recourse factoring and non-recourse factoring. Both have their merits and both have their drawbacks. It is incumbent upon business owners to weigh the good and bad of each and decide on the best option relative to their own situation.

What is recourse factoring?

Recourse factoring is when a business assumes total liability for the unpaid invoice. When the invoice is sold to the factoring company, the company is guaranteeing the invoice will be paid by its customer. As such, if that customer doesn’t pay, then the company is liable for the entire amount.

This option might include a higher initial payout for the company and a lower fee paid once the entire payment is collected by the finance company. Because the company assumes the risk, the finance company adjusts its payouts and fees accordingly.

What is non-recourse factoring?

On the other end of the spectrum is non-recourse factoring. In this case the company isn’t liable, nor does it guarantee the invoice’s value. However, it might not receive as high an initial payout on the invoice and often pays a higher fee for the transaction once it’s completed.

In this case, the finance company assumes the liability and adjusts their payout value and fee according to the risk they are assuming. This risk is based on the customer’s ability to pay and the overall risk of the industry or market the business operates in.

Whilst businesses have options between these two factoring methods, it must be noted that the company must always measure their risk versus the likelihood that the customer will pay. If the company knows the customer well and can be fairly certain they’ll eventually pay, then using the recourse option might be best.

Whilst non-recourse might not pay as much and can have a higher transaction fee, there’s less risk for the company. Make sure to choose the one that best suits your company’s immediate needs.

Is your business having a hard time with cash flow? Is a lack of available funds getting in the way of meeting payroll, paying invoices whilst trying to generate some kind of profit?

Perhaps you’ve tried securing that business loan and line of credit with little to no success. Well, don’t despair. There is a solution and it comes in the form of factoring your company’s receivables or customer invoices.

What is factoring you ask? Factoring is selling your company’s outstanding invoices to a company who will pay a portion of that outstanding balance whilst deriving a profit from what they pay your company, and what they collect on those invoices.

It’s a simple and extremely effective way to generate cash quickly. However, there are both benefits and drawbacks to using factoring and it is incumbent upon all businesses to be cognizant of the pros and cons.

• Factoring impacts gross profit:

Every enterprise works hard to generate a profit. Using a factoring company guarantees that either a large portion of the gross profit on the sale, or all of it, will be lost. It really depends upon the factoring company buying the invoices and what they are willing to pay for them.

This depends upon the health of the market as well as the customer’s credit history. Suffice it to say, if the customers in a given industry are high credit risks, then the company likely won’t secure as high a payment for those unpaid invoices.

• Factoring lets customers know there’s cash flow issues:

Most companies aren’t terribly happy about their customers knowing about issues with cash flow. After all, this is something customers are better off not knowing. It can leave customers with concerns about the viability of their supplier’s future.

Unfortunately, once a company decides to use a factoring company, it’s no longer a secret. Customers will now have to pay the factoring company and that can often be an uncomfortable situation for all parties involved.

• Factoring allows companies easy access to immediate financing:

Whilst there are some drawbacks to factoring, there are an equal number of benefits. Factoring allows companies to secure immediate cash reserves. When times are difficult or when companies are tired of customers taking too long to pay their invoices, factoring is a reasonable solution.

With interest rates and credit as tight as it is in one of the worst recession in decades, factoring has become a proven way to secure those much needed funds.

• Factoring allows businesses to make a clean break from the market:

If it’s time to close the doors, or simply time to move in a new direction, factoring allows businesses an opportunity to collect on payments and pursue new opportunities. When companies want to end a customer relationship, or need a fresh infusion of capital to start the pursuit of a new market, factoring allows businesses to get cash immediately and begin anew.

Every business faces issues with cash flow now and then. No business is immune from the effects of today’s recession. For some enterprises, the costs have mounted from increased customer bankruptcies and delayed payments. It’s a vicious circle and one late payment often leads to another.

However, there is a solution and factoring is quickly become the option of choice for companies that need cash immediately.

What’s the number one concern for businesses in today’s economy? Whilst some may argue that declining customer demand is a concern, many would agree that cash flow is an even bigger problem. After all, if there’s no cash coming in, there’s no cash going out to pay invoices, bills or salaries.

So, whilst decline in demand and declining revenues are difficult to deal with, not getting paid for those orders that are closed is an even bigger problem. With some customers taking up to 90 days or more to pay invoices, companies can often become overwhelmed with the lack of available funds. Business credit is even more difficult to secure given the current economic climate. So, what can businesses do?

Well, factoring is one incredibly popular option that many businesses in many industries, are starting to pursue. What is factoring and how does it help businesses?

Factoring is selling unpaid customer invoices for immediate cash:

Simply put, factoring is the process of taking those unpaid customer invoices and selling them to a factoring company. In return, the factoring company will provide immediate cash and then go about collecting on the invoice. Once the invoice has been paid, the factoring company will then provide the difference back to the company and deduct a fee for the transaction.

What is the fee for factoring and how is it determined?

When it comes to the fee the factoring company charges, it really depends upon a number of variables. Is your business operating in a high risk industry where customer credit is hard to come by? If that’s the case, the factoring company will take that into consideration and will likely charge a higher fee.

What’s the credit worthiness of the customer that owes on that invoice? That’s another variable to consider. At the end of the day, the fees associated with factoring must take into consideration the risk and amount of time it takes to collect on those invoices. After all, the factoring company will be providing cash up front and will therefore have to finance the time it takes to finally collect.

What types of factoring are there?

There are essentially two types of factoring. There is recourse factoring and non-recourse factoring. Recourse factoring is when your company assumes liability for those unpaid invoices. If the factoring company is never able to collect, your company is liable for the invoice’s value.

Non-recourse factoring is when your business doesn’t have any liability for unpaid invoices. In this case the factoring company assumes all risk. As such, the rate the factoring company pays your business will be higher for recourse than non-recourse.

Recourse represents less risk to the factoring company and therefore means a higher payout for your business. Non-recourse is more of a risk for the factoring company, and therefore your payout will be less.

When businesses are faced with a cash crunch, and need that fresh infusion of funds to make payments and keep the doors open, they often turn to the factoring option. These factoring businesses are professional, courteous and understand the stress and difficulties businesses face today.

With credit a constant concern, and the interest rates on business loans and lines of credit simply too much to absorb, factoring offers businesses a chance to access immediate cash.