The most successful companies are those that manage their cash flow effectively. And that means keeping a keen eye on credit. Bridging the gap between the point at which an invoice is raised, and the point at which the money enters your bank, can be a challenge. It’s why there are specific financial ‘services’ that can help. And one of the best known — and most widely used — is factoring.
Factoring is a form of cash flow funding that allows you to release up to 100% of the value of cash tied up in unpaid invoices, usually within 24 hours of raising an invoice. How it works is simple: you send a copy of the invoice to both your customer and the lender. The lender will then make a pre-agreed percentage of the invoice value available to you, collect the payment from your customer, and return to you the remaining percentage of the invoice value, minus any fees. Different types of Factoring service are available to suit different needs; for example, it does not always require the customer to pass the management of their sales ledger over to the lender. Ownership of the ledger can be retained in-house.
Factoring tends to suit smaller businesses whose principal ‘asset’ is their sales ledger (ie their invoices). The main advantage, of course, is that it provides an immediate injection of cash. Rather than having to wait 60 or 90 days, or perhaps even longer, you will have money immediately available to you to re-invest in your business. Having cash up front enables you to pay your suppliers more quickly, and negotiate better terms as a result, taking full advantage of supplier discounts for early settlement. What is especially good is that the more invoices you generate, the more cash you will receive. It therefore ‘rewards’ growing businesses, encouraging growth rather than holding it back.