Factoring is the easiest way of discounting invoices

Posted by MJim. on May 8th, 2017

Working capital forms a very important part of the current assets of a business enterprise. Normally, every business entrepreneur likes to have finance against working capital. Banks all over the world provide such finance to the business community. Of course, the banks insist on furnishing of collateral security for such loans. It might just happen that the business units are not in a position to offer collateral. This can make it difficult for the banks to discount the invoices and bills raised by the business enterprises. Hence, these business units turn to the factoring companies for discounting invoices. They call this process as factoring. This method had become very popular today with more and more business units resorting to such practices to raise money.

How does this factoring system work? It is a very simple process. Business compulsions can result in the business units extending credit for long periods to their clients. It can range from 15 days to more than three months as well. Once they perform the contract, they dispatch the goods and raise the invoices. The client accepts these invoices for payment on a pre-determined due date. If the business houses had the bills-discounting facility with the banks, they can go there and discount the bills. In the absence of these facilities, the units have the option of approaching the factoring companies.

The factoring companies check the bills and invoices for the genuineness. On receiving the credit report of your client, the factoring companies go ahead and discount these bills and invoices. In effect, you get a percentage of the invoice amount upfront. You can use this amount to cater to the next working capital cycle or pay the salaries as the case may be.

The best aspect of this facility is that there is no limit on your discounting invoices. You can discount as many invoices as you want subject to proper realization of the bills. On discounting the invoices, the factoring company sends a Notice of Assignment to your client informing him that he has to make the payment to them. On the realization of the invoices, the factoring company deducts its charges and credits the balance amount payable to your account.

You can have freight invoices factored as well. This would enable the freight company to use the funds for procuring the fuel and maintain the trucks in good condition. It is very easy to avail this facility. All you have to do is to contact the factoring company and submit your requests. Based on your volume of business, they sanction a factoring limit for your company. You can discount as many bills as you wish to. However, you have to restrict the same to the available portion of your limit.

Factoring is the easiest way to raise working capital finance. The factoring company does not lose anything in the bargain because they do their homework properly before discounting invoices. In case your client does not pay the invoice on the due date, you have to repurchase the invoice from the factoring company.