WEATHERLAB LIMITED has
gone bust; another victim of the competitive trading environment
we all have to contend with.
Could invoice factoring have saved it?
So, what is
The term invoice factoring can be defined as a financial resolution that converts current unpaid invoices into hard cash, which in today's current economic climate is important. It is possible that a
customer will try to become more competitive by offering delayed invoice payments for up to 30, 60 0r even 90 days. Without cash, life can be difficult, especially if a company has a large workforce to pay. Factoring can eliminate this kind of frustration, but it comes at a price.
How does it work?
Invoice factoring involves three parties in the financial transaction. First, is the invoice issuing company, then its customer who owes the money. The third party is the company that supplies the 'factor' (cash). The company that is owed the money sells the invoice to the third party and in return will receive cash in advance. This will, in general, be between 70-90 percent of the invoice value.
When the original debtor pays off the invoice the deal is finished. The advantages for the three parties are:
•The company that issues the invoice gets its money straight away
•The customer can take advantage of a generous time period to pay the invoice
•The 'factoring' company gets paid a fee.
There are a lot of vital issues to consider when using the invoice factoring system. When you compare this to a more traditional means of financing like a bank, then it is faster, with a higher rate of approval. With a company's cash flow sorted out, it is able to meet the demands of its payroll, expand, and have more day-to-day funding for such things as supplies and services needed. This method is particularly beneficial to SMEs who have very little leeway when it comes to capital flow. Invoice factoring should not be looked at as just an alternative to borrowing from the bank or obtaining an overdraft facility. This method can be utilised in conjunction with the bank to give a business the best of both worlds.
Factoring is more expensive than traditional borrowing, and many factoring companies will notify customers that they have financed an invoice. This makes a lot of small businesses worried that it could interfere with their customer relationships. A lot of invoice financing companies have penalties that are hidden within the contract; it is important to know what the 'triggers' are and how to avoid them. Factoring companies want to lock the invoice issuing company into a long-term contract. This will guarantee profits but may not be such a good deal for the invoicing company.
As with any financial transactions, there are pluses and minuses, and should be examined very carefully before being entered into.