To manage debt should you use a company for invoice discounting or factoring?
What is debt factoring? - If you have to pay for raw materials or pay for equipment to to carry out a service before the customer pays the invoice you could find yourself in a situation called "over-trading". This is when factoring your debts (debt factoring) comes into its own, it allows you to concentrate on doing what you do best RUNNING YOUR BUSINESS.
Approved Debts
Debts which a Factor or Invoice Discounter is willing to finance are called "Approved Debts".
- Non recourse contracts : Approved Debts are within customers credit limits.
- Recourse contracts : Approved Debts are applied to Individual customer accounts.
Disputed debts are unapproved, as are debts that are more than 90 days old.
How debt factoring works
Your company raises an invoice, which instructs your customer to pay the factoring company directly. A copy of the invoice is also sent to the factor. The factor pays pre- agreed percentage of the invoice back to your business. The factoring company then on your behalf issues a statement to your customer. The factoring company will handle all credit control procedures.
When an invoice is paid by the customer
- The customer should pay 100 per cent of the invoice directly to the factor.
- The factor pays the balance of the invoice to you. Fees and interest will be deducted from the payment. See the page in this guide on the cost of factoring and invoice discounting.
Debt Factoring Advantages
- Debt factoring helps your business grow without having to worry about the inevitable periods of low sales
- . Debt factoring helps a company speed up its cash flow by eliminating the waiting period for unpaid invoices
Debt Factoring Disadvantages
- Extra link in the chain.
- Costs involved at least 5% OF THE OUTSTANDING INVOICE.
- Factors may want to contact your customers.
- It could become impossible to get out of the factoring chain.