Invoice factoring is a process in which a company’s unpaid invoices and other debts are sold to a third party in order to free up capital.
Debts are sold for a percentage of their true value to invoice factoring services, who then assume responsibility for obtaining the full payment. When payment is received, the remaining balance is forwarded on minus the agreed commission and transaction fee.
This process is also known as debt factoring.
The Benefits of Invoice Factoring
There are many benefits associated with invoice factoring and, depending on your circumstances, it can revolutionise the way your company works. You could benefit from:
Improved Cash Flow
Collecting money can be a time-consuming process and when invoices aren't being paid on time, cash flow issues are bound to arise. This is especially true for larger operations, where significant sums of money can remain unattainable for long periods. Invoice factoring provides a quick financial boost that helps prevent issues associated with sluggish cash flow.
More Free Time
Debt factoring essentially outsources the process of tracking payments, sending out statements and contacting those companies who are slow to conclude transactions. With no need to worry about outstanding invoices, you and your team can focus on running your business instead.
Increased Potential Profitability
For most businesses, investment is the key to profit. With invoice factoring offering a fluid cash flow option, you can invest more capital, benefit from volume discounts and avoid the costs of late payment to suppliers. Even over a short amount of time you can boost profits substantially.
Improved Planning Ability
If you don’t know when you’ll be paid, how can you plan ahead with any degree of accuracy? Debt factoring offers a guaranteed payment, which can be significant for companies whose profits are reliant on reinvestment.
Prompt Customer Payments
Invoice factoring services are professionals who are experienced in collecting payments, so customers are far more likely to settle invoices punctually. This level of professionalism can also have a positive effect on the way your company is perceived.
Protection from Bad Debt
If you choose non-recourse factoring, you can protect yourself from bad debts, which are payments lost to insolvency or defaulting. A non-recourse contract means the factoring service takes on the responsibility of the debt.
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