Debt factoring is an alternative term to invoice factoring and takes place when accounts receivables, typically in the form of invoices, are raised by a business and passed to a debt factoring company for them to provide a cash advance – up to 100% of the invoices’ value.
The factoring company also takes care of chasing collection of the owed payment on behalf of the client – when the payment is made, the remaining value not initially forwarded is given to the business minus prearranged fees for their service provided.
The more that you explore our invoice finance product pages, the more that you’ll discover that this increasingly popular cash flow solution encompasses a wide range of products – each tailor-made to suit different businesses in different economic situations
Debt or invoice factoring is ideal for businesses that need help to manage their sales ledger. Alternatively, some firms who’ve spent years developing their in-house credit collection systems prefer to retain control of their sales ledger, meaning that they’ll often lean towards an invoice discounting facility or factoring financiers who allow clients to handle their own credit control (CHOCS).
If you are wishing to use a debt factoring facility, you will need to consider whether you fulfill the following qualification criteria:
Debt factoring financiers look for their clients to show that they’ve consistently achieved an annual turnover of £50,000 or more for several years beforehand.
Most debt factoring funders will only strike up arrangements with those businesses operating in the UK, rather than firms based abroad with UK branches/commercial activities.
You’ll also need to ensure that the credit terms offered to your customers when raising invoices span from 30 to 90 days.
Comparing advantages and disadvantages of debt factoring
Many traditional business finance products require substantial time to come to an arrangement: extensive paperwork, long-winded stock valuations and other mitigating factors which could deter the idea of accessing additional funding.
With debt factoring however, a facility can be approved in as little as a working week provided that your business has a stable annual turnover of at least £50,000 and satisfies any checks which the funder deems necessary to assess its financial stability. If your firm needs urgent financial support for daily operations or fulfilling peak season demand, then this service could thus prove invaluable.
Debt factoring can assist in increasing your monthly cash flow so your business can grasp new opportunities in the wake of the post-Brexit business market. For a minor cost, businesses across all of the major industries could use this to implement strategies to expand their services and client base.
The process of chasing impending or overdue payments from customers could be taken care of via an invoice factoring facility – debt collection is handled by the funder so time and effort can be prioritised to winning new business, building client portfolios or maximising operational efficiencies. Vital for growing firms who require extra time and care with key business relationships.
Debt factoring, in much the same vein as some other cash flow support facilities, isn’t necessarily suited to every UK business. For example, if your firm’s sales ledger relies on a small number of core customers of which are less reliant on 30-90 day credit terms, then your chances of securing a debt factoring arrangement are slimmer.
Additionally, the size of your current customer base can affect the funding available through debt factoring due to concentration limits imposed by certain arrangements, meaning that businesses with smaller client rosters may want to consider alternative facilities which don’t rely on this criterion such as an unsecured business loan.
Your desired funder(s) will prefer some assurances that the arrangement is low in risk and the client’s customers tend to make their payments accordingly. As such, a different finance solution – e.g. asset finance, a service focused more so on your current property/equipment holdings – may prove more desirable for your business if the reliability of your customer base is still being established.
We always therefore advise that companies curious as to what factoring opportunities are available to them first seek independent guidance to ascertain whether their customer base’s credit ratings will likely qualify them for the service.
More relationship management consideration is needed to account for debt factoring in the form of invoice factoring. The more that invoice finance has grown in prominence in recent years, the less of an issue that arrangements involving outsourced debt chasing has become for most industry players, but for any businesses relying on only a handful of clients, ensuring that these precious relationships aren’t jeopardised by the introduction of a funder into the fray cannot be overstated.
Firms concerned about these matters might consequently need to consider a confidential invoice finance arrangement, wherein the company and their funder will collaborate without ever needing to notify the customer base of their financial agreement – thereby achieving the best of both worlds.
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