What is Factoring?
What is factoring (or invoice factoring) and how does it work? Factoring provides a working capital solution and operates in much the same way as invoice discounting except this type of funding is a "disclosed" facility which means that your customers will be fully aware of the factor's existence.
How does factoring work?
Factors typically advance 80% to 85% of the face value of valid invoices, for example ...
A company raises new sales invoices of £100,000 which contain an instruction to pay the factor.
Based on the 85% advance the company would receive a cash injection of £85,000. This releases working capital "locked up" that will improve the cash flow enabling you to pay creditors and use that cash for expansion and growth.
The factor will send out debtor statements, chasing letters and will also contact debtors by telephone to ensure prompt payment.
The factor will then continue to provide you with up to 85% of the value of new sales invoices, normally within 24 hours of you raising them. The other 15% of the value of your sales invoices is passed (minus fees) onto you when the customer pays.
For any business, the potential for bad debt will always be an issue. If you are concerned about bad debts, many factoring companies can provide a facility that will include bad debt insurance protection (commercial-trade-credit-insurance.php) for additional security.
There are some circumstances where overpayments can be arranged, however this type of advance will be determined on the basis of how the facility has been maintained and if a successful and trustworthy transactional history has been built up.
Once the factoring facility is in place, there is no limit to the amount you can borrow as the level of finance is directly linked to the level of sales. So as your business grows so does the amount of funding available to you. This is in sharp contrast to bank overdrafts, which require regular re-negotiation and arrangement fees.
What are the criteria for factoring?
Factors' requirements vary from company to company. Some will consider start-ups but typically the company must be operating on a business to business basis and have a turnover of £50,000.00 or higher.
Small Business Factoring
Small business factoring is often the ideal solution for small businesses that don't have a dedicated credit controller and need access to flexible funding options that go beyond the level of finance that would be available from a traditional overdraft.
Access Credit Management can introduce you to a factor that specializes in helping smaller businesses or even start-up businesses. There are no minimum size criteria and annual services charges can start from as little as £2,000. We can also introduce you to lenders that can provide you with a loan via the Small Firms Loan Guarantee Scheme.
- Business finance services - A Guide to Factoring and Invoice Discounting
- What is Invoice Discounting?
- What is Factoring?
- Is factoring/discounting suitable for our business?
- Online Quotations for Factoring - A Word of Caution
- The Advantages and Disadvantages of Factoring and Invoice Discounting
- Recourse and Non-Recourse Factoring
- Bad Debt Protection/Credit Insurance Protection
- Export Factoring/Discounting
- Understanding the Funding Proposition
- Security Required by a Factor or Discounter
You may also find our business finance glossary of terms useful.