Wednesday, July 27, 2011

Invoice Factoring - A Cash Flow Problem Solution For SME Businesses

Cash flow is what keeps any business alive. Be it a small, medium, or large business, it is what keeps the company operating and moving. When the expenses are growing, the cash flow should have to be made stronger. The expenses should never be made greater than the cash that comes in; or else the cash flow may not be able to cope with the situation. Expenses and cash coming in should be balanced to say the least. If the problem with cash flow is not addressed sooner, a company might go out of business.

The June 2011 Sensis Business Index aimed to measure the confidence and behaviors of Australian SMEs by handling quarterly surveys. In this survey, it was revealed that cash flow problems are among the top or main problems that impact businesses over the last quarter. This cash flow problem was ranked equally with those problems that are being caused by the current economic climate (source).

The solution seen to this problem of SME businesses on cash flow is Invoice Factoring. The Interface Financial Group (IFG, is able to provide short-term financial resources. Following the success of its New Zealand business in 2004, it launched its Australia operation in 2006.

Invoice Factoring: A Cash Flow Problem Solution

Factoring is also called “debt factoring”. This involves selling invoices to a third party. With this, the third party is the one who processes the invoices and allows the company to draw funds against the money that is owed to the business. Though it is used to help manage cash flow problems of small businesses, it can also be effectively used for reducing administration overheads.

How Does Factoring Work?

A fast repayment against a company’s sales ledge is provided by factoring. Flexibly increasing one’s working capital is allowed at a cost.

When Does Factoring Start?

Factors would want to visit prospective businesses, conduct reviews of their financial situation, and study their business plan to determine if they are suitable for factoring. These factors may include independent or subsidiaries of banks and financial institutions.

Credit limit may be required so it is important for the business to know and understand how the factor operates.

When the agreement has been signed, it is typical that the factor will agree to advance about 85 percent of the approved invoices. Within 24 hours, the payment becomes available.

The end of the service period has to be taken note of. This is because most factors require to be notified at least three months prior to the end of the service.

When an invoice is raised
  • When a business raises an invoice whose instructions are to pay directly the factor, a copy of the invoice is sent to the factor.
  • An agreed percentage of the invoice is made available by the factor for the business to draw.
  • Statements are issued to the customer by the factor on the business’ behalf. Credit control measures are implemented which may include telephoning the customer if necessary.
When an invoice is paid by a customer
  • The customer has to pay 100 percent of the invoice to the factor directly and the factor is the one to pay the balance of the invoice to the business or company.
However, if an invoice is not paid, two options may be applied. Either recourse factoring or nonrecourse factoring is implemented.

For every problem in any business, there is always a solution. The only thing that needs to be done is for the business owner to see and consider all of the options surrounding the business.

Source: Factoring and invoice discounting: the basics »

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