Factoring: Invoice Discounting and Cash Flow

Accounts Receivable: Liquidity and Cash

Selling goods or services on open credit amounts to your business advancing interest free loans to your customers for anything up to five months (e.g. AB InBev).

As accounts receivable they are categorised as current accounts which is positive for liquidity but it is a definite negative for cash flow. That's where factoring or supply chain finance can come in.

Figurewizard - Factoring and Cash Flow Forecasting

Factoring is incuded in Figurewizard forecasts. If selected, all that is called for is for you to pick the percentage of invoicng to be factored, the percentage service charge, if any and the APR.

How factoring Works

Factoring or confidential invoice discounting; also known as invoice or supply chain financing resolves cash flow pressures by buying your customer debts. This can happen on a daily basis.

A percentage of the cash due for these, typically 80% is then remitted to the business in not more than two days. When the customer pays up, the 20% balance of cash due is also remitted less the factor's service and interest charges.

Service charges vary according to sales volume but should be in the region of 1 - 2% for factoring but less for confidential invoice discounting. Interest rates should be close to the business rates charged by high street banks.

Figurewizard generates a factoring / supply chain cash flow calculator from the forecasts it produces - A one click operation in real time.

Benefits of Factoring

The opportunities that factoring offers though ought to be more than enough to outweigh the costs though.

An enhanced ability to ensure that adequate levels of stock or inventory are always in place to meet seasonal demands in good time is one. Another arises from having the cash to negotiate deals offering significantly better gross profit margins or financing direct imports by letter of credit.

Confidential Invoice Discounting

For straightforward factoring, cash collection is undertaken by the factor; something they do very efficiently. For confidential invoice discounting cash collection would be undertaken by your business: Customers are not therefore aware of the fact that the account is being factored. Confidential invoice discounting is principally designed for bigger businesses.

Reputable Factoring Companies

One caveat is that you should avoid payday and similar lenders who are claiming to offer factoring services.

If personal guarantees are called for, especially if these involve the family home, you should walk away. It is highly unusual for a reputable factoring company to ask for this as their security should rest principally on the value of the accounts receivables that have been factored.