Factoring has come a long way since its introduction into the UK in the early 1960's. Initially viewed with suspicion it's now a widely used (nearly 50,000 businesses in the UK) and accepted means through which a business can generate working capital.
The word Factoring, whilst literally referring to the sale and purchase of an asset, in this case a businesses accounts receivable (debtors) at a discount, now encompasses some other facilities notably invoice discounting.
Key to Factoring is the finance it generates enabling a business to exist and grow, especially at a time when traditional bank facilities are coming under so much scrutiny.
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The mechanics behind factoring are fairly basic. If a business looks at how much it is owed by its business customers in total and works out 80% of this figure then in general terms that's how much may be raised.
However, no two businesses are the same and no two factoring companies are the same either. As time has gone by the industry has acquired its own jargon which can be very confusing to a prospective buyer.
At its heart Invoice Discounting contains the basic characteristic of Factoring in that it's the sale and purchase of a businesses accounts receivable at a discount. The core aspect that stands invoice discounting apart from factoring is that invoice discounting is usually a confidential agreement. Under the terms of a traditional Factoring facility all invoices raised carry a stamp disclosing a businesses use of the facility, with Invoice Discounting there's no such disclosure.
As with Factoring a very simple calculation can be performed by taking a businesses sales ledger balance (business customers only) and working out 80% of this figure.
This is how much money may be available instantly so if it's a materially larger figure than the business receives by way of an overdraft then there may be benefit in exploring further.
As can be expected from a business funding tool there are hoops to go through with lenders before the benefits of the facility can be realised. There are many variable to take into account and often an independent brokerage service can help make this clear and point the company in the right direction by giving them the best options available to them. This service allows the company to compare all factors and assess the best deal available to them.
Making a calculated assessment based on these factors will enable you to make the correct option for your business. You will be on the way to a healthy cash flow which will help your business grow and prosper.
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