Invoice Factoring is a financial service to businesses where the company’s assets in terms of account receivable invoices are sold at a discount to a financial company. Thus the finance company takes on the financial credit risk of the debtors and gets repaid when the debtors pay their accounts. There are three parties involved in these transactions, the business wanting to raise money through its invoices, the Factor – the company providing the service and the customer who owes money to the business. The benefits to the business are that cash flow is freed up and speeds up re4cipts to the company. The resources devoted to debt collection are reduced and can sometimes offer better credit terms to large customers to increase sales.
The process helps to reduce debt and enables the company, with its increased cash flow, to make payments to its own suppliers more quickly and, if offered, take advantage of early payment reduction. It also means that as companies increase sales and grow, the more money is available to them. It also creates credit guarantees to new customers.
There are, however, some disadvantages – for example, the Factor will often want to set limits to credit terms which takes away some flexibility. It is also quite difficult to end the Factoring agreement once agreed. One major difficulty is that if a customer disputes and invoice then the money can be recalled by the factor – and this can be extremely hard to sort out in some cases. In addition, the Factor has to be doing the job properly – it is essential that debt are collected in a timely manner or the company will be in no better position than before factoring was introduced.