Factoring companies generally take over the credit control function of a business, and are responsible for collecting outstanding payments. Usually within 24 hours of an invoice being issued the factoring company pays a percentage of the invoice, often around 85 per cent, to their client.
For companies on the verge of insolvency this immediate injection of cash, in addition to a reduction in administrative costs, can make a huge difference to financial stability. The cost of chasing debts can be high in terms of time and staff wages, and having this burden removed can breathe new life into a flagging business.
The factor pays the balance of an invoice (minus fees and interest charged on the loan) to their client on collection, and controlling the debt-collection process like this enables factoring companies to lend a higher percentage of the value of invoices than banks.
Attract new business with invoice factoring
Using the services of a factoring company means that businesses are able to attract new clients who are looking for credit terms, without having the problem of waiting thirty days or more for payment. Knowing that most of the money will be available straight away facilitates growth and helps to drive the business forward.
One disadvantage of adopting this system is that customers may be unhappy with the involvement of a third party in chasing debts. Also, it might be difficult to end a factoring arrangement as the business would need to buy back the value of the sales ledger, which could cause new cash flow problems.
On balance though, anything that improves the flow of cash through a business that’s struggling shouldn’t be overlooked as an option, and might just be the lifeline needed to survive.