Debtfactoring
is a financial transaction. In this,
a business sells its invoices to a third party called the debt factor at a discount
that is, below the market price. A business at times factors its debtors to
meet its present and immediate cash requirements. A factoring arrangement used
in by exporters in international trade finance who wish to sell their debtors is
called factoring.
It is to note that debt
factoring is the selling of receivables while invoice factoring is
the borrowing and it includes the use of accounts receivables and collateral
for a loan. On the other hand, in some of the other markets, such as UK, the
invoice discounting is also called factoring, pertaining to the assignment of
the receivables, that are also present in the factoring statistics officially.
Therefore, it is not considered as borrowing in United Kingdom. The arrangement
of this kind is usually confidential and private.In this arrangement, the
information about the assignment of receivables is not provided to the debtor.
On the other hand, the seller of these receivables takes debt or borrows on
behalf of this factor. Major difference between invoice discounting and
factoring in UK entirely depends on the terms set for the purpose of privacy.
In the arrangement of this kind of factoring,
three parties are involved. First, it is the factor that buys receivables.
Second, it is the agent that sells these receivables. Third and last is debtor
that has the financial obligation to pay the owner of this invoice. So, the
receivable, related to an invoice for the work performed by the factor or for
the products and goods that were sold, becomes a financial
asset. This asset provides the receivable owner a
legal right to acquire money from his or her debtor. The financial liability of
the debtor is directly linked to receivable asset. And, the seller sells
receivable at a price below the market value to a third party or financial organization also called factor
to acquire the cash. This is the kind of process used in the manufacturing
sector or industries where there is an urgent need for buying raw materials
that overrides their availability of cash and also their ability to buy on
account. Typically, both the invoice factoring and
discounting are used by companies and businesses to make
sure they have maintained a cash flow vital enough to meet their immediate and
current needs.
Invoice finance means where a third party complies to buy your unpaid
invoices against which a fee is charged. Invoice financiers can be independent,
or they are part of a bank or a financial institution. You can free up your
cash flow and your business to grow withit.
Why is invoice finance necessary? Click here #invoicefinance.
