Factoring Quote

Financing a business is often difficult, particularly in the current economic climate, with bank loans difficult to obtain and often coming with stringent conditions attached.

Banks may not be willing to lend at all to start up businesses, or to businesses with a short track record, or may only be willing to lend if the directors put up their own personal assets as collateral for the loan. Overdrafts are repayable on demand – and when the going gets tough, banks often ask for their money back rather than support a business through a difficult patch.

Factoring offers a convenient and easy way for businesses to raise finance on the back of their invoiced sales – without waiting for their customers to pay them. You can 'sell' your invoices to a factor, who will advance up to 90 percent of the value of the invoices as a loan. The factor will then take responsibility for collecting payment from your customers, and after taking a service fee, repayment of the advance and any interest due out of the total, will remit the remainder to you.

If your customers are, say, on 90 days' credit, you're getting the majority of your payment three months early. That can make a huge difference to your cash flow. And because you are continually writing new invoices, and receiving advances on the back of them, the effect on your cash flow is ongoing – factoring is a reliable source of future funds. There's no repayment date to worry about, as there is with a fixed term loan.

Factoring also has the advantage of being extremely flexible. Unlike a bank loan, which is a one-off transaction giving you a fixed sum, a factoring arrangement will grow together with your sales. If you're lucky enough to win a large new order, there's no need to go to the bank for a bigger loan to finance the working capital – as soon as you invoice your customer, you'll receive your money from the factor, normally within 24 hours.

If you factor your invoices, you'll also find your accounts department's load has become lighter – the factor will take over the entire debt collection process. If, on the other hand, you don't feel happy outsourcing this element of your business, you can opt instead for invoice discounting – the financial arrangements work the same way as factoring, but you retain control of your sales ledger and are responsible for collecting payments and remitting the appropriate amount to the invoice discounter.

As with other forms of finance, though, factoring deals have different costs and you need to be sure you get a number of factoring quotes to make sure you're not paying over the odds. You should aim to get at least three quotes to compare. When you look at a factoring quote, you need to look at

• The cost of factoring
• The prepayment level you will receive
• The small print

The cost of factoring

Factors charge their customers two types of fee. First of all there will be a service fee. This can vary from just half a percent of the amount advanced to 3 percent, so the difference between different lenders' charges can be considerable. A detailed factoring quote should split out this element of charges.

If you have chosen invoice discounting rather than factoring, there will still be a service charge, but it will be low – probably between 0.2 and 0.5 percent – to reflect the fact that the invoice discounter is not involved in offering a collection service, and you are still carrying out all the tasks involved in managing your own sales ledger.

Secondly, the factoring company will charge interest on the amount outstanding, for as long as it is due. The interest rate is generally set at a couple of percent above the bank base rate. Again, when you get a factoring quote, the interest rate applied should be clearly stated.

The prepayment level

A detailed factoring quote should state the prepayment level – that is, the percentage of your invoices which the lender is prepared to advance to you on receipt of the copy invoice. This is usually between 70 and 90 percent.

The small print

Not all factoring agreements are the same. Different factoring companies will offer different terms and conditions. It's important that you know the notice period for ending the contract, and this should be stated in the factoring quote. This can be as short as a month, which still allows enough time for an efficient factor to run down the invoice book in an orderly way, but it can also be as long as a year. Are you happy to be tied into the contract for that long?

The cost of your factoring agreement, and the prepayment level that the factor is prepared to offer you, will depend on the business you are in, the credit terms you offer your customers, and the efficiency with which you currently collect payment. You may also find that when preparing a factoring quote, factors take into account the diversity of your customer base – if you are heavily reliant on a small number of larger customers, you may pay more and receive a lower percentage prepayment.

Find the best deals with a factoring broker

Many businesses considering factoring approach their own bank or its trade finance subsidiary for a factoring quote. However, this may not get them the best deal.

A factoring broker such as Touch Financial can be helpful, particularly for businesses which have not previously been involved in factoring. A broker or financial consultant will have contacts with a wide range of different factoring companies, and will be able to assess which ones are most appropriate for a particular type or size of business. By using a broker, you will be able to access the best deals in the market – and the broker will do the hard work of comparing them for you.

Also in this section:

• Overview of invoice factoring
• Factoring UK – Who ‘s in the loop and why
• How to find the best factoring quotes
  
• Benefits of a factoring service
• Factoring invoices is beneficial for young businesses
• The benefits of using business factoring
• Understanding a factoring service