In a nutshell, you need to assess honestly whether or not your payment issues can be resolved by changes on your side. Whether or not this cost is justified depends greatly on your situation. Essentially, you’re paying for convenience (particularly speed). The obvious disadvantage of invoice factoring is the factoring company’s fee. While invoice finance can be very useful, it can also have its drawbacks. In fact, they will probably have staff trained to manage credit control both ethically and legally. In addition to managing slow-paying customers, using invoice finance can spare SMEs the work of dealing with late-paying customers. Invoice finance is a way for companies to extend the payment terms they offer to their customers while still getting quick payment themselves. When the end customer makes payment, the factoring company deducts its fee and then sends the remainder of the money to John and Jane Smith Ltd. The factoring company provides 80% of the value of the invoice up front. It, therefore, decides to use invoice finance instead.Įach time John and Jane Smith Ltd invoices its customers, it sends the invoices to a third-party factoring company. This means that it would be hard for the company to access regular business finance products such as bank loans. Likewise, it doesn’t have much of a credit history. Typically, it wants to be paid within a month.Īs John and Jane Smith Ltd is a relatively young company, it doesn’t have a lot of cash reserves. Unfortunately, the supplier John and Jane Smith Ltd uses has much shorter payment terms. It’s therefore quite common for them to have to wait three months for their clients to pay their invoices.
John and Jane Smith Ltd operates in an industry where it’s standard to offer long payment terms. It will not, however, build a business’s credit score in the same way as using true credit does. Invoice factoring can be used as an alternative to maintaining a line of credit (e.g. It is also known as debt factoring and invoice finance. Invoice factoring is the practice of selling invoices to a third party at a discount.
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