 Invoice discounting or factoring arrangements is used by many businesses to help their cash flow and to provide quick working capital. This especially concerns those cases where they are in an industry where long credit periods are the norm.
On the whole, all trade debts are bought. In this case the amenability for the sales ledger passes to the factor house. Moreover, a percentage of the invoice value is advanced and the remainder is paid on settlement of the debt by the debtor. The arrangement is reflected in the percentage rate offered or other terms agreed between the parties. However, it can be with or without 'recourse.'
As the factor house usually takes debts up to a pre-determined credit limit, the client is liable for if the debt turns bad. Different rates and terms are on offer- usually quite harsh for the business seeking the cash.
When a debt is passed to the finance house then invoice discounting occurs. The client remains responsible for the sales ledger and for debt collection. The aim of invoice discounting is to release money. It means to tie up in debtors, making more working capital available.
Client contact is kept up with invoice discounting. Unlike it may be lost with factoring. Besides, an administration service is almost always provided by the factor house.
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