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In the banking industry, there is a relatively new trend known as factoring. Although this service has been around for a while, it's only recently that businesses have been taking full advantage of it as part of their ordinary financial strategy. With factoring, the factoring company will pay money to the business based on an invoice the business provides. Businesses can raise money on all of their outstanding invoices, instead of having to wait for weeks and weeks to be paid by their customers.
The factor then collects the outstanding money directly from the customer. The business receives the rest of the invoice value, minus the factor's fee for the service.
Of course, this increases the business's cash flow almost immediately, as there is no long wait between issuing an invoice and getting paid. Because the factor handles payment collection, this is also something that the business no longer has to take care of.
One disadvantage is that some businesses prefer to keep in touch with their own clients, rather than everyone knowing that they use a factoring service. If this is the case they can keep control of their sales ledger and chase payments themselves, and this is known as invoice discounting.
The factor will release 80-90% of the invoice value in the first instance, paying the rest (minus their fee) once the customer has settled the full balance. This means that that business never receives the full invoice value, but the cost savings from having someone manage your sales book, and the convenience of having a healthy cash flow often outweigh this.
The factor then collects the outstanding money directly from the customer. The business receives the rest of the invoice value, minus the factor's fee for the service.
Of course, this increases the business's cash flow almost immediately, as there is no long wait between issuing an invoice and getting paid. Because the factor handles payment collection, this is also something that the business no longer has to take care of.
One disadvantage is that some businesses prefer to keep in touch with their own clients, rather than everyone knowing that they use a factoring service. If this is the case they can keep control of their sales ledger and chase payments themselves, and this is known as invoice discounting.
The factor will release 80-90% of the invoice value in the first instance, paying the rest (minus their fee) once the customer has settled the full balance. This means that that business never receives the full invoice value, but the cost savings from having someone manage your sales book, and the convenience of having a healthy cash flow often outweigh this.
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