Monday, 22 December 2014

Invoice Factoring FAQs

Invoice Factoring

For a number of companies it’s their sales invoice that accounts for the biggest asset in their balance sheet. All those people who run their own business are aware of the fact that invoices gradually get converted into cash, normally offering 2 or 3 months' value of sales. When in such a situation, it is wise to opt for invoice factoring in order to generate cash flow.

What is Invoice Factoring? 

Invoice Factoring is selling all your invoices to a third party wherein the parties involved are called debt factoring companies or factors.

Invoice factoring offers greater flexibility in accessing outstanding debts which in turn, improves your cash flow that will help in good working capital, capital hungry projects, quick business growth, extra sales ledger management, acquisitions.

History of Invoice Factoring
The practice of Invoice Factoring can be traced about 4000 years back in the era of Mesopotamia King, Hammurabi.

Invoice Factoring is perhaps one of the highly chosen form of alternative financing mainly because since it helps businesses get immediate access to working, to the value of about 90%.

Banks off lately have been restrictive about the number of loans they offer to invoice factoring and SME’s. This in turn, has increased the prominence of invoice factoring as a dependable and instant cash flow solution.

From its modest beginning around 4 million years ago, the invoice factoring which is quite popular today became extremely popular around the 1400s, when Jewish entrepreneurs began lending to exporters against invoices. This practice became common by the 1600s trade bankers from London. Invoice factoring during that time was the basis of trade between the Great Britain and United States.

Gradually, textile and transportation industry also began to use invoice factoring. With the growing popularity of the same, invoice factoring has reached a stage wherein it is an inseparable part of business today.

How invoice factoring is used?
Take supplier discounts, Improve your credit rating, Increase your sales, Increase your inventory, Increase your staff or fund payroll, Purchase new equipment.

What does invoice factoring cost?
Factoring charges include the following:

Service fee: The factoring service fees is expressed in terms of a percentage of the total amount factored which normally arrays from 0.5-3% subject to the nature and volume of your business.

Interest charge: An interest is charged by the factoring company. The cost is usually up to 3% on the principle rate that is borrowed.

What is invoice factoring and discounting?
Factoring is a lending and collections services. Cash which is given in advanced against any unpaid sales invoices is called invoice factoring. It includes partial or full credit management facility. On the contrary, invoice discounting is only funding facility. This also includes advances against unpaid sales invoices, but the same continues to run in company’s sales ledger. It is normally done confidentially without the knowledge of the customers.

What is an invoice factoring company?
Are you a start-up company considering working capital? Are your client’s commercial businesses or government who have good credit, but take very long to clear your payment? If yes, invoice factoring is the answer to all your queries. With invoice factoring, you can get up to 95% of the invoice and when you are ready to use the same, get the amount when needed – efficient and fast.

It’s certainly not possible to wait for 45 to 60 days for the payment. Invoice factoring is the best way to buy raw materials, meet payroll, and pay all your suppliers or to meet petty expenses in order to keep your business going.

How to start an invoice factoring company?
All of us are aware of the perils that are involved in factoring business. Talk to anyone in the invoice factoring field and they will be able to give you multiple tale of difficulties involved in this business.
However, look at this business from a different perspective. Do not forget the fact that the rewards in the form of profits and fees are usually very high. If you funded a start-up company, which grew into a big shark in the field, you already have the best in your kitty. It just takes a few client to take your business to the next level.

Smart moves in factoring business can take you to places.

How does factoring differ from invoice discounting?
Both invoice discounting and factoring are financial services that helps businesses to discharge amounts that are hooked up in honorary invoices. Both these require a third party firm proceeding money against unpaid debtor balances.

The differences are as follows:
  1. Under factoring, the third party company has total control over the sales ledger, getting in touch with the customers for settlement, etc. under a factoring agreement customers are aware that the amount will be factored by the factoring company.
  2. Under invoice discounting, customers are unaware the relationship that exists between your and your financing company. Hence, under such circumstance you are responsible for maintaining sales ledger, obtaining payment, invoice processing etc.

How to get out of invoice factoring?
One will have to discuss the termination with the factoring company. The best thing is while entering into an agreement with the factoring company, the termination clauses should also be clearly stated.

How to account for invoice factoring?

Factoring is the sale of accounts receivable for a price. The charge for this immediate finance is the amount cut which the factoring company charges. Along with invoice factoring, there are additional charges like bank payment, monthly centre charge etc.

There are different ways to account these transactions. However, the most common one is to maintain a Liability account and expenses accounts.

How to choose an invoice factoring company?

There are a number of invoice factoring company which offers there services. However, it is extremely crucial to opt for the right one for smooth operations in the future. The primary factor to be considered is to opt for the one which is associated with an authorized body which regulates the working of all factoring companies. Apart from this, one also needs to check on their reputation in the market and the clients they serve.

How does invoice factoring work?

Factoring offer a value for your invoices. It also helps a person better manage his sales ledgers and reduces the burden of chasing customers for payment. Take a quick walk through this step-by-step guide.
  1. When we supply products or services to our customer we make an invoice.
  2. This invoice is electronically updated onto your ledger
  3. If you wish to cash this invoice, you get in touch with an invoice financing company which will offer advances on an agreed percentage
  4. The financing company then sends a customised statement to the customers, collects payment on your behalf and allocates the same to your account.
  5. The financing company then pays the amount of the invoice to you, minus their fees.