Invoice factoring can help to improve cash flows

Businesses will normally have a substantial part of their finances tied up in work in progress, inventories and finished goods dispatched to customers to whom they have given credit facilities. While finance involved in the first two items is unavoidable, it is possible to arrange finance on unpaid invoices so that cash flow improves. This money can then be reinvested into the business so that the growth potential can be achieved.

Financing Solutions: Factoring and discounting are the two methods that can be used to arrange for finance on unpaid invoices. These methods while essentially using invoices as a starting point, differ in the manner in which the payment is collected and the way the sales ledger is controlled. In both cases cash between eighty and ninety percent of the invoice value is available almost immediately, while the balance is paid after the invoice amount is paid by the customer. The company or agency arranging such finance does charge certain fees for the funds.

Invoice Factoring to Improve Cash Flow: Invoice factoring involves the sale of your invoices at less than the value that is on them. This allows you to realize a substantial portion of the money within hours of submitting the invoice to the factoring company. It is then this company which will collect the invoice amount from the customer as and when it is due. Once this amount is collected, the balance due on the invoice is paid to the business, less the agreed discounted amount. For such a system to be effective it is very essential that businesses deal with customers who have good credit ratings, so that the factoring company can be sure of getting its payment from them. The fact that third parties are collecting the payment makes invoice factoring irksome to some customers.

Invoice discounting as an Alternative: Businesses offer discounts to customers when they pay their dues within a specified number of days. This allows the business to plan his finances based on this assured return. Businesses can also offer the invoices to companies that can provide finance against them, while they continue to retain control of the invoice. Invoice discounting allows the business to have the responsibility for collecting the amount from customers for outstanding invoices. This is in a way, a sort of loan against which no securities or guarantees are required. Companies that offer such invoice