Invoice factoring is a widely practiced activity in the business world today. It is basically a tool that a large number of businesses use to gain quick access to cash instead of having to opt for options such as loans and bank overdrafts. Invoice factoring in the UK works very simply. A businessperson gets into an agreement with a financial institution where they agree that all the invoices due to the businessperson will be sent to the financial institution. The financial institution then pays to the businessperson the amount quoted in the invoice after which the financial institution follows up with the person to whom the invoice was being sent to get their money back. In a nutshell, instead of the businessperson having to wait 7 days or thirty days for their customer to pay them what they owe them, they get the money immediately the invoice is prepared from the financial institution after which the customer will pay the money to the financial institution after the days quoted on the invoice.
Invoice factoring has become a very popular practice largely owing to the fact that it allows the businessperson to concentrate on the operations of the business as opposed to chasing after debts to maintain the liquidity of their business. In essence, the financial institution purchases the business’ receivables for cash at certain agreed upon discount rate. The usual rate mostly used lies between 75% and 90% of the receivables total value. A large number of the institutions will however put the requirement that the receivable being bought not be more than 90 days old. The other requirements that will be set for the purchase of the receivables will normally vary from one institution to another. However, there are certain fundamental factors that can never be ignored and these include the industry in which the business is operating, the monthly volume that the business reports and the credit worthiness of the business’ customers.
There are two kinds of invoice factoring UK; recourse and non-recourse factoring. With recourse factoring the business itself will be held liable for the amount of money that its customers will fail to pay to the factoring institution while with non-recourse factoring, the business is not in any way liable of the amount of money that its customers will fail to pay to the factoring institution.
When recording factoring in the balance sheet, it is not recorded as a liability as it is not a loan. Instead, the receivables are simply removed from the balance sheet and the amount received from the factoring institution added to the cash item of the balance sheet.