Invoice factoring at its best
Centuries ago in England, factoring or the purchasing of accounts receivable was a cornerstone of trade, allowing companies to continue their business unhindered while waiting for customer payment for goods. Today, it is one of many options available to businesses, large and small, in managing their financial picture. Banks now dominate the financing of businesses on a credit basis and sell “total package” banking, so many small companies and their financial advisers don’t consider the advantages of invoice factoring. Larger companies often use factoring for purposes such as transferring a portion of their accounts receivable to cash for a stronger financial position.
Companies that aren’t aware of what invoice factoring really is and how it can be used may find themselves in an unnecessary “credit crunch” as they grow, or struggling in a turnaround without knowing where to look for interim financing. The answer to their problems may be sitting right their on their accounts receivable books. While English Common Law, the basis for many countries’ legal systems including the US, required notification of factoring to the debtors, in the USA many state laws now allow the debts to be transferred without it.
For those without a financial background, the concepts of accounts receivable and invoice factoring can be explained like this: in business, it is customary for a company to allow customers a period of time to pay their bills, often up to 60 days. In effect, the selling company is lending money to their customer as a courtesy to facilitate business. If that loan is something the company can ill afford, especially if the company has paid for raw materials or services which were provided to the customer, they may in fact be paying interest on a loan to finance the extension of credit to the customer. Invoice factoring companies can step in and not just provide another loan as a bank would, but actually purchase the accounts receivable, or debts, outright. There are a number of ways that they do this, but in essence this is the benefit of invoice factoring – a company gets the money they are owed, less the costs of factoring, in a much more timely manner.
Depending on how the factored receivables are sold, the customer may or may not know that the debt has been transferred. Factored invoices are usually the highest quality ones, companies with an excellent credit rating, and if they are larger established companies they are probably familiar with the process of dealing with the transfer of invoices. A proper, straightforward letter of explanation should make them aware of the situation, and so long as the goods and services are properly provided they should have no concerns about the transfer.
Factoring companies provide a number of services as part of the purchase of invoices. They evaluate the credit of the companies to whom the invoices are sent, and they may purchase insurance to protect themselves should problems arise, allowing greater acceptance of risk. As the owner of the debt, they will take over the entire process of receiving the debt, and the seller will simply have cash in the bank.
Invoice factoring companies can be large or small. Large, well-known capital companies such as GE Capital provide factoring funds, and many companies and brokers providing invoice factoring services can be found on line. Gathering information on how to combine turning a portion of your invoices to cash with other financing techniques is an important step, and many invoice factoring companies will be glad to help explain the process and costs to you and your financial and legal advisors. It’s important to note that invoice factoring should not be used in every case because there are costs involved in transferring the invoice risk to the factoring company, and factoring low-profit invoices may not be as beneficial in some cases. Companies using invoice factoring for the first time will need to understand how it should appear on the books, usually simply as cash on hand, eliminating reference to the receivable entirely.
Copyright Factoring Aid
.
Tag: best invoice factoring