Debt Factoring - Learn More | Compare Lenders | Free Advice
Debt factoring improves business cash flow by advancing money against unpaid sales debtors.
This is a valuable facility for businesses short of working capital.
A business that is owed £500,000 could raise £450,000 in days by debt factoring.
If the trade debtors stayed on the balance sheet without debt factoring, depending on how many invoices make up the £500,000, a business offering credit terms could wait between 30 and 90 days to have the cash available.
Letting a factoring company take over your sales ledger has other business benefits as well:
- Pricing is competitive between factoring companies
- Outsourcing your sales ledger frees up time and allows managers to run the business rather than chase administration
- Freeing flowing cash lets your business expand
- A debt factor may have business intelligence about the credit standing of customers and may help negotiate improved terms with your suppliers
- Commercial debt factoring is fast - cash is paid on invoice and is immediately available for your business to spend
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Debt factoring comes in several types of which the main two are:
Commercial debt factoring – key points:
- The factoring company takes on your trade debtors and manages your sales ledger.
- You send a copy of each invoice to the factoring company.
- You are paid 80-90% of the invoice value within 24 hours
- The factoring company collects payment on your behalf, deducts a service charge and any interest due on the prepayment and sends you the invoice balance
Invoice discounting – key points:
- The factoring company lends your business up to 90% of your trade debtors
- You manage your sales ledger and credit control
- The finance is short term and is generally repayable within 90 days
Differences between invoice factoring and discounting
The crucial difference is with invoice factoring; the debt factoring company takes control of your sales ledger, chases up payment and deals with your customers to collect monies owed.
With invoice discounting, the sales ledger responsibilities lie with your business and you chase up payment and deal with customers.
Key to this is setting up a bookkeeping system to keep tight control of invoices and trade debtors.
Invoice discounting is also cheaper than factoring because instead of outsourcing the administration and paying a service charge, your business keeps the process in-house.
Invoice discounting is often a one-off or irregular arrangement that means you have a looser relationship with the factoring company. Invoice factoring is a more hands-on day-to-day business relationship.
Another consideration for a lot of businesses is invoice factoring is carried out in such a way that the clients realise a third party is in the loop, but invoice discounting is an arrangement between the business and the discounter.
Invoices to overseas clients
If you have a trading mix in the UK and overseas, debt factoring treats both in exactly the same way and pays the same percentage on presentation to the factoring company.
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