Compare Invoice Finance is a leading independent invoice finance comparison team providing a hassle free factoring, invoice discounting, and trade finance facility that is tailor made to its’ clients finance requirements.
Small businesses today suffer much as they have always done from customers who decide to pay on their own terms rather than the terms on which they were supplied. The most common form of credit in business is 30 days from the date of the statement. A business will issue an invoice when a job is completed or when goods or services are supplied, and then at the end of the month send a statement to the customer. The customer then has 30 days in which to pay, i.e. at the end of the following month.
Some customers do actually pay on time, but many don’t. Indeed, they will take 60 days, 90 days, and even more in many instances, which means that the supplier has to spend time and money sending further statements, letters, and employing staff to telephone the customers in order to chase up the money. When all else fails, the account may be handed over to a debt collector who will take a commission for collecting the account, or to a solicitor which then involves his fees of upwards of £250 an hour plus court costs. At the end of the day it could be the case, and sometimes is, that no money is ever collected and the business has spent a small fortune trying to get paid. It is frequently the case that a business collapses under the weight of bad debt.
However, there are a number of options open to businesses who give credit to their customers, enabling them to get instant payment of the bulk of their invoices and at the same time relieve them of the necessity of employing a credit controller to chase up overdue accounts. They can factor their invoices, which involves a factoring company which is not only a lender but also takes over the job of sending statements to the customers and chasing up overdue invoices. The business can effectively wash its’ hands of the whole problem.
The business very simply sends an invoice to its customer and at the same time sends a copy to the factoring company. The factoring company will usually pay up to 90% of the value of the invoice direct to the business within 24 hours. In some cases, this figure can even be 100%. Instead of waiting three or four months to get paid, the business now has virtually instant cash flow which it can use to buy materials, negotiate discounts with suppliers for cash on delivery, or expand the business by taking on extra sales staff. The factoring company takes over the job of collecting the money which the customer now has to pay to it rather than the supplying business. When payment is made, the factoring company sends any balance to the business minus its fees.
However, for many businesses, factoring has some inherent problems. The first of these is the worry that the factoring company may take a very tough line with customers who do not pay on time, and the customer may decide not to put up with it and take his business elsewhere. The customer may also consider that if he needs regular supplies the business that is factoring may be doing so because it is not financially viable (although this is by no means necessarily the case) and thus his supplies could dry up, so he goes to a competitor for that reason.
In order to overcome this problem, factoring companies now provide invoice discounting. With invoice discounting the business still sends an invoice to the customer and a copy to the factoring company which then pays up to 90% of the invoice value within 24 hours. However, the business continues to run its own accounts department and credit control systems and stays in direct contact with the customer. Hence the business has instant cash flow, yet its’ customers have no idea that it is being funded in this way.