A factoring company will perform the invoice processing, credit checks, verify invoice receipt and accuracy, open new customer accounts, assess credit limits to minimize the risk of bad debt, handle collections and payments, and send reminder letters and final demands when necessary. Your company will no longer be responsible for managing the debtor administration or credit control processes in-house because these processes will become the responsibility of the factoring firm. Your customers will also be made aware of third-party involvement. A factoring agreement will be drawn up, and per the agreement, your company will hand over its debtor’s book to the factoring firm to collect on the invoices. Invoice Factoring is a business transaction whereby a factoring company buys your accounts receivable from you and pays you a specific percentage of their value. Generally, customers are unaware that a third-party (i.e., the invoice discounting company) is involved. Additionally, you will need to continue administering your company’s sales ledger and managing the credit control processes. With this process, your company is still responsible for collecting payments directly from your customers. The lender will then charge you a percentage of the invoice amount as a fee for borrowing the money. A financial service provider will pay you the funds you need, secured against your business’s accounts receivable. With invoice discounting, your company is basically borrowing the working capital you need. In some ways, both invoice factoring and discounting share similarities, but there are some key differences that you should take note of before deciding which service is right for your business. What is the Difference Between Invoice Factoring and Invoice Discounting To add to the benefits, invoice factoring does not come with the high-interest amounts that plague bank loans. So, you don’t need to wait the 30, 90, or 120 days that are required with traditional bank financing. Depending on the factoring company you choose, you can get approval and payment for your invoices in as little as 24 to 48 hours. Invoice factoring services also offer a much more immediate cash flow solution. The better your customers’ creditworthiness, the higher the invoice percentage the factoring company will be willing to pay you upfront. Instead, the factoring company will look at the creditworthiness of your customer to determine any risk involved in collecting on the amounts they owe. Unlike traditional bank loans, your credit status (or the credit score of your business) typically does not affect whether you will be approved or not. This capital can be used to fulfill your business needs: whether it be for paying employees and vendors, ordering stock or equipment, or paying your business expenses. Instead of waiting for your clients to pay the amounts they owe, you will get immediate working capital. Once your customer pays their outstanding invoice, the factor will remit the remaining balance to your business, minus a factoring fee. The factoring company will then collect on the invoices for you – freeing up your time for critical business tasks and giving you access to immediate cash flow. You sell your unpaid accounts receivable to a factoring company that will, in turn, give you a percentage of the invoice amount upfront. Invoice factoring can be a quick and efficient way to free up working capital and reduce the time you spend chasing customers for late payments. If too much time is spent chasing customers for payment, it leaves less time for more important business operations. Not only this, but customers with unpaid invoices can also be harmful to your employees’ time. A deficit in working capital can hinder your business’s ability to reinvest in operations and take advantage of new opportunities, which is something no business owner wants. Unpaid invoices can put pressure on your company’s finances, leaving you with less cash to pay suppliers, payroll, and other unexpected expenses. Regardless of industry, your company depends on constant cash flow in order to stay operational. It’s a flexible and simple way for small businesses to get quick access to working capital. Invoice factoring is also known as invoice financing, accounts receivable financing, and invoice discounting. Invoice factoring is a form of financing that provides funding to businesses for working capital purposes.
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