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FACTORING
PRODUCES CASH FLOW
To maintain an excellent credit history, you first need to stick to a budget so you know exactly where all of your money is going. What’s more, you need to make sure you keep daily note of every single business expenses.
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Factoring Articles
How to Use Invoice Discounting for Cash Flow
The same thing as invoice factoring, invoice discounting involves selling your company’s invoices that are not yet due to be paid to a factoring company at a discount. The discount provides the company that purchases your invoices with their profit; but by receiving cash today for your invoices, invoice discounting enables you to meet your financial obligations including: payroll, suppliers, and also emergency expenses.
Factoring enables you to expand your business more quickly than if you had to wait for your customers to pay in 30/60 or 90 days. You could prepare your business prior to crucial time periods like holidays, or seasons, pay suppliers early and then perhaps take advantage of early-payment discounts. Another advantage is that you might be able to pay for marketing or advertising that will bring in more sales, and even take on new projects.
Basically invoice discounting involves locating a factoring company to purchase your accounts payable at a discount that depends on the length of your invoice’s payment window. The discount typically ranges from about 1.5 to 5 percent for every ten days until the payment is due, with the lower discount percentages going to the most credit-worthy of the companies that owe you money. Your own business and its creditworthiness will have no bearing on this sale. With invoice discounting, you can sell part or all of your credit-worthy debt.
Many companies sell their invoices on a notification basis. This means that the company purchasing your invoices, known as the factoring company, also collects on them. Or you could work out terms with the factoring company who is purchasing your invoices on a self-collect. The difference is that when it is a notification sale, your debtors will pay the invoice discounting company directly, however when you collect the debts yourself, then forward to the factoring company, your customers will never know that you sold their invoices to another company. It is seamless. It is also easier to sell invoices on a notification basis because the invoice discounting company knows about the sale, this way they will get their money back on time.
The advantage of selling invoices on a notification basis is that the invoice discounting company is responsible for collecting the debt; meaning they assume all the credit risk. The factor is often a broker, not the company purchasing your invoices. Therefore, if you use invoice discounting on a regular basis to fund your company, it will automatically reduce the need for staffing a credit and collection department. By establishing a good relationship with a factoring services company, you can even establish what could be considered a line of credit based on your invoices. Instead of using all the funds forwarded to you as the payment for your invoices, you simply take what you need and then leave the rest with the invoice discounting company, thus allowing your account to accrue interest. Then you will be able to draw on the account as cash is needed for your business.
You can also use your accounts receivable as collateral for a loan, but it will involve getting a bank to accept your credit as well as your debtors' credit. Then you would need to collect cash that equals up to half and up to ninety percent of your accounts receivable. This strategy is a bit less expensive than invoice discounting, but it can be less flexible and take more time.
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