These days it can be difficult to source business financing, with stricter guidelines and lending criteria from traditional financiers. For many businesses experiencing cash flow, factoring may be an option to consider.
Just what is factoring? It is the process of selling your receivables to a factor at a discount, and receiving cash for them timely rather than waiting for the normal customer payment cycle to complete. The factor will then take over the collections and administration of these outstanding invoices. It is not a loan, but a sale of a financial asset.
Factoring is ideal for fast growing companies who are squeezed for cash, or for businesses who invoice goods and services on credit terms. It is not suitable for businesses who issue progress claims (such as building contractors), retailers or professional services.
There are three main differences between factoring as a source of finance, and bank loans. Firstly, the emphasis is on the value of your receivables on your balance sheet rather than the value or credit worthiness of your business. Secondly, it is a sale of a financial asset rather than a loan, and finally, there are three parties to the factoring arrangement (your business, your customer, the factor) rather than two (you and your bank).
Invoice discounting is a form of factoring for businesses who need to access the money tied up in their receivables, but still want to maintain and manage their own ledger. Your customers will not be aware that you have sold their invoices. For businesses who lack the expertise or resources to manage their debtors ledger, or are undergoing rapid growth, this is a suitable option.