Factoring is now considered an effective way for businesses to ease their cash flow problems. Small-to-medium sized enterprises (SME’s) often struggle to find financing with banks due to the strict restrictions placed by banks such as long credit history or substantial assets. InvoiceInterchange offers alternative funding options for companies that have strong financials and are looking for ways to better manage their receivables. These alternative funding options provide the business with immediate funds that can be utilized to pay for company expenses or improve their working capital.
What is Factoring?
What does factoring really mean? With so much terminology it can be hard to understand what it means exactly. Definitions can fall into two main categories: factoring and invoice discounting and it’s important to know the differences.
A factoring company will want to take over the entire receivables ledger and handle the debt collection process. The company could insist on collecting payments to their bank account, in many cases meaning the suppliers’ customer will know the invoice is being factored.
What is Invoice Discounting?
On the other hand, invoice discounting provides a more flexible version to factoring. Businesses have the liberty to choose one or more invoices for early payments with out the obligation to hand over their entire receivables ledger. In addition, it provides the ability to keep the transaction confidential. Typically, financiers will advance between 80-90 percent of the invoices’ value. The remaining 10 to 20%, less financing fees, are disbursed when the customer pays the invoice in full. Despite popular belief, these alternative funding options are not classed as a loan-neither create a liability on the balance sheet or encumber assets.
According to Coundouris, in Singapore and Hong Kong, the majority of SME still prefer transactions to remain confidential, compared to the US and Europe where factoring is an accepted business practice.
Advantages to invoice discounting:
Like other alternative funding options available, there are many advantages to invoice discounting. Most alternative financiers work with online platforms that typically take anywhere between 1-5 days. At InvoiceInterchange you can receive financing in 24 hours. Financiers analyse companies in more flexible ways to access their ability to repay thus their approval rate is significantly higher. One of the most important requirements to qualify is to have invoices from creditworthy clients. The debtor’s financial status is weighed heavily. Lastly, the transaction can remain non-disclosed increasing confidentiality.