A brief explanation of invoice factoring highlighting how it can improve cash flow by releasing working capital tied up in the sales ledger.

All factoring is based on the provision of funding against Invoices raised on credit terms. A factor will enter into a factoring agreement with its client who will assign its invoices to the factor as it raises them to its customers (the debtor). On assignment of the invoice the factor will then pay an agreed percentage of the value of the invoice to its client in advance of the invoice being settled by the debtor. This releases vital working capital tied up in debtors and provides the cash flow to allow a business to grow.

The factor will also take over the responsibility of maintaining the sales ledger and provide a credit control and collection service and in some circumstances provide bad debt protection. This releases the burden of administration from its clients allowing its prime movers to concentrate on the development of their business in the knowledge that the factor is providing not only the funding they need for growth but also ensuring that debts are chased for payment as they fall due.

Normally in a factoring facility all invoices will carry a notice of assignment instructing payment to be sent direct to the factor. The factor will credit the client on receipt of payments and allocate the remittances to the appropriate debtor account. A report is sent to the client on a daily basis showing how payments have been allocated i.e. the invoices paid. Additionally where say an initial funding of 80% was made against the invoice, the remaining 20% will be paid to the client after deduction of the factors charges.

If you would like further explanation in respect of the mechanics of invoice factoring please CONTACT US TODAY and we will be pleased to be of assistance.