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Quite feasibly, when you look at a factoring service contract, at first it may be confusing. It really isn’t that hard to decipher. What factoring constitutes is a financial facility that will honour payments from purchasers to your company immediately the invoices have been issued.

What this translates to for small or medium sized business concerns is that invoices that are slow to pay are transformed into cash. It is a way to help small businesses to capitalise on any future benefits immediately: it is also referred to as accounts receivable funding. It allows these small businesses to rectify any cash flow issues through covering any cash flow gap when a product or service is sold to another corporation on the basis of credit. Factoring is akin to invoice discounting or debtor finance.

There is one significant difference, in that factoring allows the financier to control the accounting, whereas invoice discounting or debtor finance has no such control. The enterprise therefore is an agent for collecting the funds on behalf of the financier. Invoice discounting enables the business owner to continue to operate business without the concerns of the loss of good relationships and reputations.

What precisely can factoring offer your business? The majority of businesses trade on credit terms and as a result when services and or products are exchanged and the relevant invoice raised, there is a period of time (frequently 30-90 days) before payment is received from your purchaser. There are a few answers to this problem that will also enable you to continue trading and increasing the business. One such suggestion is a bank loan or overdraft: not such a great idea when it comes to financing a company you wish to expand. Overdrafts have the problem that they can be called in with little notice and they are rarely of a value that will allow you to get the best out of your business. You also are required to provide personal security. As such, the best answer for cash flow problems is to use invoice finance.

Once the products or services are delivered and an invoice is created, the factoring facility will fund the invoices: the rate can be as much as 90%. The usual time period for financing is 90 days from the date of the invoice. As soon as the client makes the payment, the factoring business will send you the amount you have not been paid minus any charges. These differ according to the type and level of service you choose.

What is the best choice? This depends upon the particular needs of your business. Should you require your accountancy to be outsourced, a factoring facility may prove beneficial as it will free up some time and reduce the days you are in debt. Some factoring facilities will provide protection against bad debts: these commonly cover up to 90% of the outstanding balance, provided you have an agreed protection limit in operation.

When you have chosen a factoring company and signed a contract, what happens? When a buyer is sent an invoice, you are obliged to send an electronic copy of the invoice to the factor. They will then advance to you the agreed percentage of the invoice. When the factoring company is sent the balance of the invoice by the buyer, they will send to you the remaining amount, once fees have been extracted. These fees are categorised as service fees, for the accountancy aspect and a discount fee, which is furnished over base rate, usually on a daily basis. As you can see, factoring is the most effective solution for businesses reliant upon invoices being paid on time.

What tells you if you need a factoring facility? * if the company is new and dependent upon cash flow. * if your company does not depend upon a few major clients. * when you are looking to increase the turnover of the business. * when you can envisage the possibility of an increase in sales and you want to capitalise on it. * when you simply don’t want to be worried about the financial side of your business.

These are the basic aspects of factoring. It is your decision as to whether factoring or invoice discounting could be helpful to your company.