Factoring Explained

At any given point around 50% of invoices in the UK are overdue, putting great stress on businesses who think they have done the hard part in earning their money, when in fact the hard part is collecting payment and keeping your business going.

Bridging the gap between raising invoices and receiving payment is a problem many business owners face. Speak to anyone successful in business and ask them what fundamental functions their business operates on and most will tell you the same thing, good cashflow and even better debt manage.

The knock on effect of poor cashflow is stumped growth and even failure as your business fails to cope with the cash demands by overheads, such as staff, equipment and other essential resources.

To add to the issues of waiting for payment you also need to look at how effectively you manage your debtors. A lack of headcount and/or suitable management systems could make managing your debtors difficult or even impossible. Which again leads to great strain on your business cashflow.

Factoring is a service, not just another form of finance

Factoring is a service aimed to help businesses with two key issues:

Turning your invoices into cash
Factoring is essentially the process of selling your unpaid invoices for cash. Typically you can release between 80%-90% of your invoices value as soon as they are issued, allowing you to put the money where it belongs, back in your business.

Unlike other forms of finance, the cash available to you will grow as your turnover does. Because the cash advanced to you is directly related to the value of your invoices, as your turnover grows so will the funds available to you.

Sales ledger management
As part of a factoring service your lender will take control of your sales ledger, credit control and collect payment from your customers. This is ideal for smaller businesses who lack sufficient management systems and headcount to effectively manage debtors.

Some factoring companies offer a confidential service so your customers needn’t know you use the service.

Unlock the cash tied up in your sales ledger. Get a factoring quote online now >>

Factoring in action

Here is a quick guide on how factoring works in practice:

• Step 1: You provide services or deliver goods to your customers

• Step 2: You raise an invoice and send a copy to your factoring provider (some lenders allow you to submit invoices online)

• Step 3: The Factoring Provider makes available to you the agreed prepayment percentage of the invoice value, less an agreed service charge

• Step 4: The factoring provider will collect the outstanding payment from your customer(s)

• Step 5: Once payment is collected from your customer the factoring provider will credit your account with the remaining balance

• Step 6: On the last day of each month an agreed discount charge will be debited to your account if you have not drawn down the total amount made available to you by the lender.

Is factoring right for my business? It could be if you:

• Provide goods or services to other businesses in the UK

• Have a projected turnover of more than £50,000

• Provide between 30 – 90 days credit terms.

How much does factoring cost?

Factoring can be a relatively inexpensive way to consistently borrow cash for a long period of time. The main cost is associated with the ‘service-fee’, which is usually a fixed percentage of how much you borrow from the lender.

Unlock the cash tied up in your sales ledger. Get a factoring quote online now >>