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Factoring future cash payments

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Factoring future cash payments

The idea of having cash in hand is an important concept in business. If a business doesn’t have to wait to get paid by customers it can make investment in stock and have available cash to pay bills. In fact the concept of getting future cash payments in the bank immediately avoids the need to a business to take out expensive loans or overdrafts or using up savings and cash reserves.

Cash in hand has more value than the promise or expectation that a business will receive payment from an invoice up to 90 days in the future. Money a business holds today is worth more because it can invest it and earn interest or pay day to day costs.

What does the factoring of future cash payments involve?

  • Finance for the supplier on a regular basis when 24 hours after invoices are submitted.
  • The factoring company pays the customer up to 95% of the invoice value which is for working capital requirements.
  • The factoring company looks after the book debts
  • The factoring company manages the trade debts of the client
  • The factoring company looks after the sales accounts ledgers
  • The factoring company can even send out the invoices.
  • The factoring company looks after the collection of receivables
  • The factoring company collects the payments due from the debtors of the client.
  • Protection against the default in payment by debtors; the factoring company carries the risk of any bad debt (if the debtor fails to pay). The customer is charges more money for this service.

Setting up a facility to factor future cash payments

In the UK businesses have been factoring future cash payments for over 50 years and factoring is still used by 100,000s of businesses in today’s tough business environment.

Factoring future cash payments is advantageous to business owners who sell goods or services on credit and do not want to wait up to 90 days to get paid.

The concept of factoring future cash invoices is carried out by factoring companies who pay up to 95% of the value of the invoice straight away and then pay the balance of the invoice (less fees) once the invoice has been paid. The factoring of future cash payments is either carried out by a bank or a specialist factoring company.

There are many reputable factors in the UK offering to factor future cash payments and to end if a business shops around it can get very good rates and terms which will enable a business to trade and compete with large and well established businesses.

Advantages of factoring future cash payments

  • Cash received can be used to grow the business
  • The business will always have money for payroll
  • There will always be cash available to pay off current liabilities.
  • A entrepreneur will have the confidence to know it can make future cash payments
  • Cash can be used to pay the business owners dividends and bonuses. This cash would otherwise have been tied up in accounts receivable.

Disadvantages of factoring future cash payments

  • Please note that factoring is carried out by profit making organisations such as banks or factoring companies so there are fees attached to the factoring of future cash payments.
  • Factoring reduced gross profit levels, this is often overlooked because of the cash flow implications of any arrangements.
  • Personal relationships with customer can be damaged because the factoring of future cash payments can be more aggressive that the customers collecting direct.
  • Many people do not really understand the concept of factoring and so there is the misunderstanding that firms using factoring are in financial trouble.

The UK factoringhelpline.co.uk has been a leading business advice service for the last 10 years. Its staff have spent many years in the banking, finance and insolvency industry. The factoringhelpline.co.uk has helped over 10,000 business gain access to factoring facilities enabling them to get access to future cash payments. The factoringhelpline.co.uk knows first hand the challenges small business owners in the UK face in today’s difficult credit climate. For advice and solutions on factoring future cash payments please call 0800 597 4757.

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