It is upon every business operator or entrepreneur to establish ways on how to manage the working capital and cash flow in their ventures. With many factors in play during operation, monitoring this two can be overwhelming. That is where now invoice finance comes into your assistance. It involves a third party advancing you up to 85% of an invoice before the actual date when the payment was done. Your operations won’t have to be affected by your money being tied in invoices that are likely to slow down your planning. Invoice finance comes in two forms; invoice discounting and invoice factoring. This article will explore on what invoice factoring entails and how it works;
Invoice factoring involves engaging a third party to settle any unpaid invoices owed to the business. The third party who is the factoring company has the responsibility now to collect the amount from your customer who will pay to them now since they settled the debt on their behalf already. Not every factoring agent can take up such role in your business. Most of them look at the annual turnover of a business before coming in. That is why small and upcoming business finds it hard to get their services.
This approach works in four simple steps;
- The invoices are usually raised and will show the debt to be factored and which factoring institution your customer will settle the amount owed to.
- The invoices are uploaded electronically to the company for approval. If accepted, the agreed amount is released to the business person and usually made available within a 24 hour period.
- The factor communicates with you via monthly statements and are in charge of your credit control and contact your customers on making their payments when due.
- The customers remit their debts to the factor directly. Once the money is paid in full, the company takes back the money they paid for the invoices to you and any balance is passed to you too.
Isn’t that relief to entrepreneurs? But you should note of other charges passed to you after successful transactions. There is the factoring fee as well as the accrued interest. The service charge ranges from 0.5 to 3% of the total amount of all factored invoices. Their interest is usually charged around 3% above standard rates and typically calculated against the withdrawn funds at any given time. The interest is worked out daily but billed in monthly packages.
After all this, is invoice finance worth it? Do you cost benefits and expand your operations to increase your profit margins.