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You might choose to factor invoices issued to customers of your business for a number of reasons. Since there might be several benefits in engaging a third party invoice factoring company to take care of your invoicing processes, it may be helpful to review some of them.

Cash flow

The essential principle is that you are selling to a third party partner the right to manage and collect payment on the invoices issued by your business.

In recognition of these rights, the factoring company (or simply the factor, as such a partner is formally known) typically pays an up-front cash advance on the payments it is authorised to collect. This initial cash advance is generally made very promptly and might be as quickly as within 24 hours of your concluding the agreement to factor invoices.

The arrangement thus effectively minimises the cost to your business of delays in the collection of payments and, thus, improves your cash flow situation. Since cash flow management is one of the major headaches for the typical enterprise, invoice factoring might bring yours significant benefits.

Invoice management

Although your business continues to issue invoices to your customers, collection – and the management of those collections – becomes the factor’s responsibility.

In terms of the time, effort and resources devoted to this essential part of the typical business, therefore, considerable savings might be made. In effect, it might free up your business to concentrate on other, even more important, activities – such as the production of goods and services, marketing, or advertising, for example.

Typically, the factor takes a much wider view in understanding how your business works and what makes it tick, rather than restricting itself to the more limited role of debt collection.

Costs

Naturally, there is a cost attached to buying the services of an invoice factoring company. This might take the form of a fixed fee or fee based on a given percentage of the value of the factored invoices. In addition, you are also likely to pay interest on those cash advances made by the factor.

Nevertheless, there remain ways in which you might choose to reduce the cost. Perhaps the most straight forward is an arrangement by which you still factor invoices – but with recourse. What this means is that although you grant a factor the right to collect payment on your invoices, your business nevertheless retains responsibility for bad debts (those invoices on which the factor has been unable to collect payment within an agreed period of time). Since your business continues to assume the risk of bad debts, therefore, the fees charged by the factor are typically reduced.

Comparisons

There are a number of factoring companies offering different levels of service at varying scales of fees. Specialists in invoice factoring, however, are available to trawl all of the services offered in the market and prepare quotes for those likely to be appropriate for your own business needs. If you want to learn more about ways in which you might factor invoices, the services available and the comparative costs, therefore, you might wish to consult such a specialist.