Factoring - Find the best cashflow solution for your business
Cashflow – the secret of success
Success in business is often determined by one simple element: the careful management of cash. Conversely, most businesses fail because they run out of cash, even though they may have significant amounts owed to them by their customers.
Extending credit is of course an essential part of business. Bridging the gap between the point at which an invoice is raised, and the time that payment is received, however, can be difficult. It is for that very reason that various forms of ‘cashflow funding’ have been devised, and one of the best known is Factoring.
In addition to preventing business failure, Factoring is also commonly used to fuel business growth by making cash more readily available, and by making cashflow more predictable.
As with Invoice Discounting, Factoring often requires less personal liabilities than most traditional forms of lending, as cash is secured against the future payment of invoices.
What is Factoring?
Factoring is a form of cash flow funding which allows you to release cash from unpaid invoices as soon as they are raised. You could release between 80-90% of the cash tied up in unpaid invoices, with the cash made available to you within 24 hours of raising an invoice.
How does it work?
With Factoring, you send a copy of the invoice to both your customer and the Factoring lender. The lender will then make a pre-agreed percentage of the invoice value available to you, this is usually between 80-90%.
The lender will then collect payment from your customer and return to you the remaining 10-20% of the invoice value, minus any fees.
A Factoring service doesn’t always have to include the customer passing the management of their sales ledger over to the lender. Factoring, like Invoice Discounting, can operate as a true funding line with no other services. This is commonly referred to as CHOCS (Client handles own collections).
For more information see: Factoring Infographic – A new take on understanding how factoring works
What are the advantages?
The principal advantage of Factoring is that it gives your business an immediate injection of cash. Rather than having to wait 60 or 90 days, or perhaps even longer, you will have money immediately available to you to re-invest in your business. Having cash up front enables you to pay your suppliers more quickly, and negotiate better terms as a result, taking full advantage of supplier discounts for early settlement.
A further advantage of Factoring is that the credit management function – including collections – is taken away from you. You are effectively outsourcing the sales ledger management to your Factor, allowing you to get on with what you do best – running your business – without the worry of not getting paid.
Factoring can also include credit protection, which will protect the customer from bad debtors, i.e. if one of their debtors is unable to settle their invoices due to financial difficulties/insolvency. Factoring lenders also prove to be excellent business advisors, helping you to grow your business.
How much cash will I receive?
Typically a Factor will advance between 80-90% of the invoice value. What is particularly good about Factoring, is that the more invoices you generate, the more cash you will receive. It therefore ‘rewards’ growing businesses, encouraging growth rather than holding it back.
How much does it cost?
Factoring is 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.
There is also a discount / interest fee which is a pre-agreed percentage APR of all cash drawn down by the customer from the lender.
When should I consider Factoring?
Certain sectors are perhaps better suited to Factoring than others – especially those sectors (Recruitment for example) where the principal asset is an invoice and there are no other assets such as buildings, plant or machinery to raise money against.
Typically but not exclusively, Factoring tends to be used by smaller businesses, with a minimum turnover of at least £50,000, that are unlikely to have their own in-house credit departments.
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