What is Invoice Factoring
Invoice factoring is a term used to describe the short term financing of unpaid invoices. It is a financial transaction but not a loan. IN the next few minutes we hope to explain to you the benefits of factoring.
The survival of many businesses in the SME sector depends on their ability to access funds to free up cash flow.
A business will sell its unpaid invoices to the Factor in return for a cash advance. At its core what underpins the transaction is the strength of the debtors (invoices).
What Can I Do with the Funds Raised
Using the unpaid invoices of the business, the owner can gain access to small business working capital without much difficulty and in time to meet the necessary expenses of the business. For business owners who have not used this type of funding before the three main benefits of debtor, finance are listed below.
- Accessibility to Cash: For a small or medium business access to this type of funding means they can participate more competitively with larger businesses in their sector. Often larger businesses are regarded as being more solid as they have access to cash reserves that enable them to adapt to the ebb and flow of the market quickly or to increase inventory or production at short notice. The absence of or accessibility to capital can frustrate the ability of small businesses to react to changing market conditions in the same manner.
- Outsourcing collection: The nature of the debtor finance product is that if customers are paying ‘on time’ the business would not have a cash flow problem. Another important yet time and resource consuming task that can weaken a small business’ ability to stay responsive in the marketplace is invoice collection. Chasing up overdue invoices can be a very onerous and protracted task and many small businesses simply lack the ability to dedicate human resources to it. This only serves to diminish their ability to ensure that debtors pay on time. Small business cannot afford to allow invoices to remain unpaid because this impacts its working capital availability. Factoring your invoices can simplify this problem as the factor takes over all your rights to pursue the customer for payment. This includes the right to take legal action.
- Debt avoidance: Small businesses are less likely to be able to absorb any downward movements in the economy and are often constrained by them. This is due mainly to the size of the business and the unpredictability of their bottom-line. The options open to small businesses if they need cash to meet an emergency expense or if they lack funds to match their expansion plans or production increases are limited. They look for lenders willing to make a loan to them. If the business is a new one, this can prove to be almost impossible. The loan, even if available, may be a very expensive one that results in a huge drain on the business’ finances on a recurring basis. With factoring, this debt burden can be avoided completely because the asset being used is the business’ own invoice and cash is advanced against this asset so no repayment is required.
I hope the above has explained to yu some of the benefits of factoring