It is well established that factoring can be a useful tool for unlocking working capital to keep your business afloat in tough times or during growth periods. The financial language surrounding factoring and other similar financial instruments can be complicated and nuanced. In this article, we will discuss this language in detail and make it simple to understand so that you can understand the function of each of these instruments.
Accounts Receivable Are an Asset
In the auto repairs industry, when works are completed an invoice is sent out to the debtor or insurer to pay. Often these invoices will pile up, which can be a headache for a business with limited capital to reinvest in ongoing repairs and keep customers happy. These unpaid invoices are an asset which can be traded for a significant portion, greater than ninety percent of their value with factoring. In a factoring transaction, a third-party factoring company can buy your sales ledger and take on the responsibility of securing payment for the invoices on their own.
How does Factoring compare with Invoice Discounting?
With Invoice Discounting your unpaid invoices are once again used as instruments to leverage capital for your business, but these invoices act more like collateral in a loan arrangement than assets. This is because you are still responsible for seeking and receiving payment from the debtor on the invoice and then paying this money onto the invoice discounting company. Invoice discounting often enables you to pay out at a higher rate than factoring, because you are still carrying the risk of the invoice.
Security through Factoring
Factoring can go a long way towards securing financial security for your business, as you can avoid accumulating unpaid invoices and bad debts. You are able to carry on the day to day operations of your business, and focus on the activities you are an expert at. Because your invoices are essentially being paid immediately, you have constant cash flow and are always able to reinvest money in parts, labour and expansion rather than waiting on payments.
Before your business enters into a factoring arrangement with a third-party, they will usually audit your books and ascertain that you are a suitable client for their services. You can then be assured that their work goes on to facilitate the efficient management of your business, because your profits will create profits for them in turn.
Talk to Working Capital Finance Today About Factoring or Invoice Discounting For Your Auto Repair Business
Working Capital Finance are industry leading providers of factoring services and invoice discounting for the auto repair industry. If you are in the industry and think our services might be of use to you, please get in touch with one of our professional consultants today by calling 02 9968 2328 or contacting us online.
Please note: The content of this article should be considered informational and not construed or considered to be actual financial advice.