Revealed - How You Can Generate Cash For Your Business

by David Willetts

Invoice Factoring

For most small medium sized businesses positive cash flow is always of great importance.

All too often the owner is looking for a business solution to overcome a cash shortage. Typically the actions taken to mitigate the impact of the situation include delaying settlement of suppliers accounts, seeking a bank overdraft facility or taking out a business loan against which significant security may be required.

It may be appropriate in such circumstances for the small medium sized business owner to consider INVOICE FACTORING.

Invoice Factoring is an arrangement whereby a financial institution will advance moneys against the value of the business sales ledger receivable balance or future sales invoices as they are raised.

The attraction to a business owner struggling to find sufficient finance to support the required working capital of the business is enormous.

In a very short period a significant proportion of the sales receivable outstanding debt on the balance sheet can be replaced by cash, enabling the business to invest, grow or simply survive a short term difficulty.

The management of the sales ledger would normally pass to the Invoice Factor and that body would have responsibility for the collection of valid outstanding monies from the debtor.

This will then relieve the business owner of credit management responsibilities; however, charges would be levied by the Invoice Factor for the services it renders.

Effectively, whilst the business will sell and invoice goods or services to its customer, it also sells its debt to the Invoice Factor in exchange for the advance against the sales invoice value.

The business should not expect to receive full value of the invoices raised. In fact the sum advanced against a sales invoice will be subject to business risk and negotiable between the business and the Invoice Factor. Usually between 65% and 90% of the debt will be advanced.

In the United Kingdom it is normal for the advance to be paid within 10 days of raising the invoice, with the balance payable upon receipt by the Invoice Factor of the full settlement from the customer.

The advantages for the small medium business owner struggling to generate adequate cash flow are:

1. If sales ledger debt currently exists then a significant cash lump sum could be available through factoring the receivable balance.

2. A significant proportion of the cash inflow from future sales would be received within a short time of raising the invoice, rather than having to wait perhaps 45 days or longer.

3. The business relationship with the customer is not affected.

4. The credit control function is taken away from the business, perhaps relieving the business of much administration.

5. Normally Invoice Factors do not require any form of personal security; the sales ledger provides the assurance that the advance will be cleared when the customer settles the invoice.

The main consideration for the business owner to reflect upon when considering invoice factoring is the credit worthiness of his customers. If customers are bad risks then the Invoice Factor may be reluctant to enter an arrangement to provide this type of finance.

David Willetts is a qualified accountant and an Associate of the Institute of Business Advisers. More details on David's background and experience can be found at DAW Consulting Limited. Also if you are seeking a solution to your business problem then visit David's site at SME Business Solutions.