Factoring Could Help Boost the Cash Flow of Your Business

The practice of factoring is being adopted by a number of businesses to help them secure payment of invoices more quickly and also improve their access to cash.

This financial transaction is where a business sells its accounts receivable or its invoices to a third party - albeit at a discount - for immediate payment.

It is usually used by companies when the available cash balance that they hold is not sufficient to meet their existing commitments or to meet their other cash needs such as fresh orders or contracts.

Using this system allows a business to maintain a smaller ongoing cash balance, though by selling the invoices for a lower amount than they are actually for.

For most firms, this is a calculated risk.

While selling its invoices at a discount, the firm is working on the prospect that the money it would receive for those invoices when they fall due for payment would be better used to serve its immediate purposes such as growth or investment.

The way factoring works is that the invoice seller presents the invoice for sale to the buyer, or the factor, for less than the invoice is worth.

The factor, before taking on the invoice, will do some basic research to ascertain whether the debtor is creditworthy or has a history of bad payment. Once taken on, the factor will then seek payment from the debtor.

This is not a particularly new accounting process. In fact it was known as part of business life in England well before the year 1400 and has been in use in various forms ever since.

Over the centuries the process of factoring has evolved and more recently has been used in government circles as well.

Today in the UK alone, finance experts suggest that the practice is used in some form by around 50,000 companies as a means of releasing finance.

The business, it is estimated, generates in the region of £200 billion a year.

A number of enterprises operate specifically in the factoring and invoice discounting business and actively contact companies and organisations that they believe will benefit from such services.

These firms market their expertise and services on a number of points but primarily they suggest that it is a way for a company to get access to money quickly and safely and that it also avoids the difficulties and inconveniences that can be involved in collecting bad debt.

The system is also promoted to potential customers as helping facilitate and smooth out their cash flow, and also a way of borrowing money that is secured by their debt.

Once the agent takes on the invoice and the debt, it has the responsibility of collecting it and in turn making a profit by paying the invoice seller less cash than the face value that it paid for it.

Different organisations may charge different rates or seek different levels of payment for different services, and much of that may be dependant on the risk associated with an invoice they purchase.

For a firm thinking about selling invoices, it may be worth looking around and seeking quotes before going down the factoring route to improve cash flow.

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