Why Invoice Factoring And Discounting Are The Preferred Methods Of Financing

Invoice factoring is a type of financing that uses invoices collected from debtors as a form of security

. Against this security, money is raised and the management and collection of the debt is outsourced. There are several businesses that offer invoice factoring UK services that oblige the debtor to directly make payments to the factor. The factor makes a partial payment of the amount invoiced promptly.

The main advantage of factoring is that the majority of the revenue from the sale of a product or service is received instantly once the invoicing is carried out. Once the amount stated in the invoice is fully paid, the factor makes the payment for the remaining value of the invoice after the reduction of interest charges and other fees.

It also becomes the duty of the factor to manage the collection of the invoices once an invoice factoring broker is hired. This indicates that it's the factor's duty hereon to collect the money from customers. Additionally, the factor also sends regular statements to customers and exerts continuing efforts to follow up on the invoices that were not settled within a certain time period.

When it comes to non-recourse invoice factoring UK, it is solely the job of the factor to collect the debts. Recourse factoring on the other hand states that the client bears the risk of the bad debt. In case the invoice remains unsettled, it is the factor that has to reimburse the amount. Consequently, the amount of money acquired from recourse factoring is secured against debtors.

In non-recourse factoring, the factor is responsible for the risk pertaining to unpaid invoices. Therefore, the factor charges a higher fee to cover this risk. Here are some common advantages and disadvantages of invoice factoring.

*The sum of money raised can vary with the revenue which makes it a great method to provide funds for working capital.

*When deploying non recourse invoice factoring UK, the requirements for working capital are lowered because it permits the instant realisation of debtors. This consequently shortens the cash cycle.

*Invoice financing and factoring are usually long term contracts in which the notice periods and the requirement to pay off debt make it difficult to end the agreement.

*Factors ensure the immediate acquirement of money since they are trained professionals.

*Factors offer the best services when it comes to evaluating the customers' credit history.

*Customers are aware that the business uses factoring because the payment is made directly to the factor.

*Factoring can only be used by a business entity and not for individual or personal circumstances.

*Invoice factoring UK removes any apprehension about reclaiming bad debt and the cost and time incurred to pursue unsettled debts.

This is why a lot of businesses prefer to use invoice discounting to receive their unpaid debts. The money a business receives from a factor can then be used for other purposes such as making payments to creditors or investing in securities. Over all, this process increases liquidity and gives the business more money to use according to their will.

by: Fred Smith

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