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Invoice factoring facility is a transaction in which a business sells its accounts receivable (invoices) to a third party, known as a factor, at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.
Invoice factoring facility involves a third party, such as a bank, buying a company’s unpaid invoices or lending money against the value of those invoices.
There are two main types; invoice factoring and invoice discounting
Invoice factoring is when the bank or other invoice financier collects money owed by customers, ultimately resulting in customers being aware this type of funding is being used.
Invoice discounting is when the invoice financier lends money against unpaid invoices, but the financier won’t collect on the company’s behalf, with income offsetting the loaned amounts.
As long as a company has a decent turnover and satisfactory volume of accounts receivable, invoice factoring and discounting are viable options that might ease cash flow issues, however, invoice discounting is most suited to established companies with annual turnovers of at least £250,000. Due to the nature of the financing stipulations, this route is rarely feasible for start-ups and new businesses.
If unexpected funds are needed quickly, both invoice factoring and discounting can provide access to funds in a relatively short time frame, which may ease the cash flow issues experienced when waiting for large invoices to be settled or experiencing client payment problems. Both services come with fees attached, meaning you will never recoup 100% of the invoiced amount.
Invoice factoring facilities are provided by most banks and financial institutions who offer business related services, as well as specific invoice finance houses.