What is Factoring?

Factoring originally started in the USA and was used to finance the textile trade on the East Coast of America. It was introduced to the UK about 40 years ago but the real growth has been over the last 10 years partly as a result of the High Street Banks being less than enthusiastic about offering facilities to small businesses.

Factoring in its basic form is a way of financing your business by assignining invoices to a factoring company in return for an advance of up to 90% of the gross value of the assigned invoices. The name of the Factor will be printed on the invoices and your customer will pay the factoring company direct. On receipt of the payment the balance of the advance will be repaid to your company less charges. The percentage advance will vary acording to the quality of the product and customer. The stronger your business, product and customer the higher the advance against the invoice.

The factoring company will issue monthly statements and reminders and effectively become an outsourced sales ledger department. Many small businesses find the more experienced methods employed by a factoring company a real advantage to ensuring their customers pay on time.

The costs are based on workoad and risk. There are two charges, a factoring charge which is normally a percentage of the gross annual sales (sales including VAT) and an interest charge for the money that is advanced by the factor.

Many factors offer a bad debt protection against possible bad debts. There will  always be an additional charge for this service.

Is Factoring Right for Your Business?

Firstly your business must be selling a product or providing a service that is acceptable to a factoring company. Ideally you must be able to show that an invoice is payable once the product or  service has been  provided to your customer. Most businesses ae suitable but the following issues can be a problem to most factoring companies;

Goods sold on a sale or return basis                                                       Businesses that buy goods from their customers                                             Stage payments over a period of a contract                                                    

Your customers must not  have a clause in their terms prohibiting assigment of the invoice

Your business must be selling to businesses or Government Bodies. Factoring companies cannot deal with businesses who sell to consumers. Factoring companies will expect your customers to be creditworthy. It is important that the majority of your customers are mainly within terms, factoring companies will not advance against old debts.

Your business will be expected to have a good accounting system that produces a robust paper trail that shows evidence that your customers have been provided with the goods stated on the invoice. Remember todays customer may have to be taken to Court to obtain payment. Unless the paper trail is sound the debt may not be enforceable.

From your own point of view you will want to ensure that your business benefits from factoring. Lets look at the scenario below;-

Debtors              £100,000

Creditors              £30,000                                                                                 Bank Overdraft     £50,000

If we assume that the factor will advance against £90,000 this should  raise approximately £76,000. If the Bank overdraft has to be repaid the excercise will raise an additional £26,000. If the business is growing and the debtors figure grows to £150,000 then factoring will be a real bonus.

Remember an 85% advance is not automatic and a factor will advance less if your business does not satisfy all their requirements.

The Next Step

If you think factoring will help your business then go to contact us and we will advise accordingly.