Factoring & Invoice Discounting - WHAT IS FACTORING?
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When traditional forms of lending is out of reach or not practical for your company factoring is an ideal solution this gives you a better scope and ability to maintain your working capital.
One of the first signs of an economy slowing down or showing signs of recession, is a slowing down of a business's cash flow so If a business does not have a procedure in place to raise additional working capital may be in for a tough time when their receivables begin to slow down.
WHAT IS FACTORING?
Cash flow is a business's blood, and when it stops flowing so does your your business, all is not lost however Factoring enables you to turn your outstanding invoices into real money, and is a proven way of converting liquidating receivables into ready cash. Also Factoring has been in use for hundreds of years, so it is not untried.
Credit at most commercial banks is becoming less, this can leave a business with few available alternatives for improving their financial standing in time of difficulties.
The process of factoring carries an important function in that it allows easy cash-flow for organisations that may otherwise be in a situation where they may suffer payment problems. Most companies in the UK that carry out factoring services usually work on a percentage where they take a percentage of the total invoice value. A good example of this would be to take a hypothetical situation. Take for example an individual factors a 100 pound invoice; the factoring company will pay on average of about 95% of the total invoice value retaining about 5 %. This has a benefit for the borrower in the sense that for a small fraction of the cost they are alleviated of the burden of any financial constraints associated with waiting for invoices to be paid. Due to the fact that in the UK an invoice is a legal document, there is a requirement that the invoice be paid.
Why does a business need to factor its invoices?
For a business providing products or services to other businesses, you are usually financing the purchase until the outstanding balance has been paid, most payment terms range anywhere from 7 to 120 days, but businesses are like people and will hold of paying as long as possible.
The decision to replace the bank overdraft with factoring can be an important step for your business so it can operate with or without limitations imposed by traditional banking methods.
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