Factoring – also known as 'debt factoring', ‘invoice discounting’ or ‘invoice factoring’ – is designed to bridge the gap between finishing a job and receiving payment from clients.
It’s a type of short-term debt finance which allows you to sell your invoices to a factoring company and receive a percentage of the funds owed to your business in return.
What is the difference between invoice discounting and factoring?
Invoice discounting is similar to factoring, in that it allows you to borrow money against outstanding invoices for short periods of time. The main difference is that while a factoring company will also take responsibility for your sales ledger, with invoice discounting, your business retains control over your sales ledger.
Both factoring and invoice discounting are useful methods of improving your company’s cash flow and working capital. What’s more, they can help you reduce administration overheads.
What are the benefits of factoring?
In trades where large invoices are issued and the trade norm is for a long period of time to elapse before payment, it may be worth considering factoring. A factoring company will pay a large proportion of invoice value (normally around 85%) immediately and then collect the money from customers forwarding any balance after fees are deducted.
The risks of factoring and invoice discounting
Yes, factoring removes credit control from your concern and hands it over to experts. It also brings a lot of the debtor balance straight into cash where you need it. But it costs money. The improvement in cash flow is immediate, but the cost goes on for ever. You lose a month’s cash flow because you never dare drop out of the system. Think hard before getting addicted.
Find out more about factoring and invoice discounting on the Business Wales website.