What is Factoring for Business?
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 assigning 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 according 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 workload 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.
Factoring in its basic form is a way of financing your business by assigning 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 according 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 workload 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.
What a does Factoring facility provide?
- Factoring allows you to unlock money tied up in current and overdue invoices.
- In most cases you can see up to 90% of your invoice paid when you need it, with the balance paid out on collection by lender (after any fees payable).
- There is an option for Bad Debt Collection, where you can protect your business against unpaid invoices due.
- Professional Credit Control - having a professional team from the Factoring provider to help you in securing the invoice payment can help to speed up payment from debtors.
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 are suitable but the following issues can be a problem to most factoring companies;
Your customers must not have a clause in their terms prohibiting assignment 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 today’s 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 exercise 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.
- 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 assignment 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 today’s 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 exercise 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.
What you need to know
In most cases Factoring companies will review each business
with a view on risk and opportunities of providing a facility for finance, so
businesses that show greater opportunity for growth and solid customer
relationships will more often than not be offered favourable terms. We can help
you to ensure that the business and its trading history is communicated
effectively to the Factoring companies, we can also help to filter through the
various lenders select those that may have preference for your business sector,
such as with construction, manufacturing, retail or finance.
The next step
Our team are here to help. We have a great deal of experience in helping clients to ensure they select the optimal commercial finance solution for their business. Every business is different and every lender will view a potential customer independently, so we are here to help you build a case that will help you to secure the best terms for your finance facilities and to help leverage your business strengths to increase the opportunity to deliver maximum value from your lender.
If you think factoring will help your business then go to contact us and we will advise accordingly. We can provide independent advice on lender selection, rates and how best to shape your case for improved terms.
If you think factoring will help your business then go to contact us and we will advise accordingly. We can provide independent advice on lender selection, rates and how best to shape your case for improved terms.
"Hugh has worked with us on a number of occasion as an advisor and with regards to Factoring in particular, he provides excellent advice when selecting a provider. I have found him to be indispensable when seeking out independent information that shapes the core of our decision making on our lenders and facilities."
L Smith, London
Your terms are our priority
Hugh Craen, Director
Our Director Hugh Craen is many years experienced in the Financial Services sector. With considerable insight in finance products when working with businesses across a range of sectors, he has helped clients to achieve optimal lending terms and to ensure that they have fair and current frameworks that allow clients to work within the requirements of the lenders.
We put your requirements first and then look to find a lender who can help you achieve on your business goals.
We put your requirements first and then look to find a lender who can help you achieve on your business goals.
