Fundamentals of Business

Costs of bank bills

Depend on the following factors: Current and expected short term market rates of interest. The period of credit.
The rate of commission changed by acceptance houses which are determined by:
a) the credit worthiness of the borrower.
b) Nature and quality of security.

Factoring and invoice discounting
Factoring and invoice discounting can boost cash flow by raising finance against outstanding invoices invoices. You will typically be able to borrow 80-85 per cent of the value of the invoice.

Companies of all sizes, including start ups, can use the service. However, it is generally considered most appropriate and cost effective for companies anticipating a high growth in turnover.

Factoring companies - known as factors - chase debts for you and pay you a fixed proportion of invoices within a pre arranged time and the balance of the invoice - minus their charges - once a customer pays up. With invoice discounting you are responsible for chasing the debt but can raise an advance on an invoice. As there is less work involved for the invoice discount company, charges are usually lower.

Advantages

√ You can maximise your cash flow - rising up to 85 per cent on outstanding invoices.
√ Factoring reduces the time and money spent on credit control.
√ The factor's cred credit control it system will help assess the creditworthiness of new and existing clients.
√ Factoring often protects you against bad debts debts.
√ Factoring can reduce the cost and risk of doing business overseas overseas.
√ If you don't want to pay for a collection service you can use invoice discounting.

Disadvantages

√ The factor usually takes over your sales ledger - some customers may prefer to deal with you personally.
√ Factoring may impose constraints on the way you do business. Factors may want to pre approve your customers, which could cause delays.
√ When you want to terminate the agreement you will have to pay back the money that has been advanced to you against the invoices - requiring you to look at alternative forms of finance.
√ Some invoice and factoring companies tie you into long termination notice periods - usually three months. Some companies require one year's notice, which could be costly for you.