Collecting debts through invoice discounting and debt factoring

There is another way to distance yourself from the whole process of debt management. It could be suitable for a small business owner that has lots of credit sales, but does not want to deal with administering them.

It can also be a good option if you need quick cashflow to sustain your business.

Debt factoring

Factoring essentially involves you "selling" your credit sales to a factoring company at a discount in return for immediate working capital (for example, you might get around 80% of the invoice value upfront).

If you choose a "full service" option, then the factoring company then assumes responsibility for administering your credit sales (including credit checks) and chasing up late payers.

Obviously there is an administrative cost, but this might be a lot less than the salary of an admin person you might have to take on to handle the task. This option also frees up your time and energy to grow your business.

Invoice discounting

The other option is simply discounting your invoices to a factoring firm. In essence this enables you to get a line of credit from the factoring firm that you can draw on. However, there are charges involved and factoring companies will put your business through a credit check before they accept you as a client.

Also, most factoring firms will not accept all invoices. For example, they may not accept invoices that are under dispute or that have been outstanding for more than a certain time (for instance, 90 days).

Factoring firms are only likely to take your business if you have an established track record, a certain level of turnover and good credit management policies.