When asking the question, what is invoice factoring, it is important to make a clear distinction between what is invoice discounting and what is invoice factoring. Although often confused, these two methods of finance are markedly different. Invoice discounting (and what is invoice financing essentially), is when you loan money on the strength of your debtors book. It is a confidential facility in that your customers never need to know about it but it is more complex and rigid.

Invoice factoring however is an extremely flexible form of finance whereby factoring companies advance money to limited companies, sole traders, partnerships and Plcs on their receivables i.e. as and when invoices are raised. The money is advanced quickly and effortlessly and without sacrificing equity or entering into rigid and extended processes with a bank.

Factoring receivables is an adaptable and more acceptable form of finance, which provides you with cash flow necessary for working capital and growth. Factoring in essence bridges the gap between raising an invoice to your customer and getting that invoice paid.
With factoring the amount you borrow grows directly with your sales, immediately freeing up cash against the money tied up in unpaid invoices. You can release up to 98% funding against unpaid invoices.
Apart from increasing cash flow, factoring receivables provides a complete credit management function. One of the beauties about factoring is also the fact that you hand over the responsibility for the collection of that debt to the factor. Their professional in-house credit control team can tailor a facility to meet your requirements. These invoices will be managed in a controlled manner acceptable to your business model, designed as if you were chasing them yourself.

It is important to note that there are two types of factoring; recourse factoring and non recourse factoring. Non recourse factoring is when the factor takes on the bad debt risk. So if the factoring company has advanced money on an invoice to a customer who subsequently goes down leaving the debt unpaid, this bad debt is swallowed by the factor and there is no recourse to you. With recourse factoring, the factor will come back to you and demand that the debt be repaid. Of the two options, recourse factoring is obviously a cheaper option in the short term. But only you can decide which option suits your business long term.

Factoring companies take comfort in your sales ledger and audit trail, so additional security is not required. No other assets are required to secure this type of funding. You can relinquish your Personal Guarantees and additional security whilst obtaining funding to fuel your business growth.

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Invoice Factoring by G.E.T. Invoice Finance