Invoice factoring (or accounts receivable financing) is used by businesses to release funds that are caught up in client invoices. Invoice factoring companies agree to offer payment, in return for the unpaid invoices that your business is owed. By using a service like this, your business will obtain the funds it requires to pay its’ overheads, pay its’ staff and grow.
When arranging an accounts receivable financing contract, invoice factoring companies are usually prepared to pay larger amounts for recent invoices. The reason for this is that older invoices are regarded as high risk, because there is a bigger chance that the client will fail to pay. When it comes to invoice factoring UK businesses typically use it to free up capital and generate cash flow quickly. However, some businesses use this service to circumvent the risks linked to delayed invoice payments. With invoice factoring UK businesses can transfer the financial risks to the organisation that buys the rights to the invoices. Thanks to invoice factoring UK businesses can concentrate on performing core business tasks and planning ahead, instead of chasing up unpaid invoices.
If your business urgently needs to retrieve the money it’s owed, accounts receivable financing might be a sensible choice. Through invoice factoring UK businesses sell the ownership rights of unpaid invoices for a fee that is below the invoices’ value. By doing this, these businesses receive some of the money that is due from the invoice far sooner than initially expected. On the flip side, invoice factoring companies make a profit, while they wait for these invoices to be fully settled.
For the companies that buy invoices, payment collection is not a problem, because this is usually the main focus of their business. Buying overdue invoices is not typically a risky venture for these companies, because they are skilled at collecting funds. Consequently, this arrangement benefits both parties involved by equal measure.
Indeed, invoice factoring companies can enhance your profits and provide your business with a wide range of advantages. These companies give you access to a regular supply of money, which increases as your turnover increases. You can get up to eighty-five percent of the capital released, against the unpaid invoices’ value. Therefore, if you are owed £500,000, you might be able to receive £400,000 in less than a week. As you do not have to spend time pursuing debtors (and your cash flow is improved), you have more free time to build your business. Better still, these companies have teams of committed professionals, who compile and mail out statements, contact all of your clients, collect your outstanding payments, and keep detailed and professional records of every transaction.
In addition, knowing precisely when you will be paid helps you to plan financially. By using a factoring service, you can take advantage of enhanced profitability, because you can pay your suppliers sooner. Also, you can buy in bigger quantities, and make the most of any bulk discounts on offer. You can safeguard your business from bad debts, by opting for non recourse factoring. Moreover, you might discover that some clients respect factors and settle their payments quicker. A factoring service offers your business versatility, along with access to an array of extra products, like cash flow loans and transactional or trade finance. You get the money immediately after an order is invoiced, which allows you to use it for capital investments and for funding future orders.
You should think about the invoice factoring costs that are imposed by the different factoring providers you are considering hiring. The majority of providers calculate invoice factoring costs by keeping a set percentage of each batch of invoices processed (i.e. the face value of these invoices). Although the percentages vary, you should expect invoice factoring costs to be anything from four to six percent of each batch’s face value. Of course, you want to obtain cash flow from your invoices immediately, not later, so you should look for factoring services that provide generous advance invoice factoring rates on each batch of invoices. This way, your invoice factoring costs will work to your advantage. Advance invoice factoring rates vary from one company to the next, and this is also governed by the credit worthiness of the organisations involved (i.e. the business wanting to use a factoring service, and the business that the invoices are issued to). However, on average, advance invoice factoring rates are seventy percent to ninety percent of the invoices’ face value.
The majority of these types of services offer advance invoice factoring rates of eighty percent to ninety percent of the face value of all invoices in a batch. Obviously, this will mean that you get less in the end, after the payments on every invoice have been obtained. Notwithstanding, the bigger advance percentage allows you to access the cash immediately, to pay for business overheads. This could help you to avoid paying late fees, or other expenses that you would otherwise incur. Some factoring providers offer both a smaller factoring fee and a bigger advance payment. This will enable you to get the optimum benefit of this kind of business service.
Typically, factoring service providers offer useful business guidance and insight. These service providers might give you helpful data about your clients’ credit standing, and they can assist you with negotiating better contracts with your suppliers. Factoring providers will perform credit checks on your clients, which improves the quality of customers that your business deals with and gives you a good spread of debtors.
Factoring invoices is an affordable form of sales ledger outsourcing, which frees you up to run your business. Factoring eradicates the stress of collecting invoice payments, and saves you a considerable amount of time. The factoring provider deals with these tasks, effectively controlling the sales ledger for your business, along with the processing and collection of invoice payments. As well as reducing the default risks for your business, this service eases staff workload by making your debt collection and ledger management procedures more efficient.