Factoring and Invoice Discounting

What is factoring and invoice discounting - and how do they work for business? Is4profit takes a look

1. Getting started with factoring

Different factors will have different criteria. By searching around, it is likely you will find one whose terms suit your business. However, a typical factoring process may involve the following steps:

1.1 The factor audits your books and accounts to establish that your sales ledger meets its criteria.

  • Most companies which use factoring have a turnover of more than £200,000. Some factors will consider start-ups and companies with turnover of £50,000 or less.
  • Generally you should not have just a few customers and no one debtor should account for more than 25 – 40 per cent of your business. Although some factors will take a view where there are only a few customers.
  • Factors only provide finance to businesses dealing on trade credit terms. Factors prefer businesses which offer customers industry standard credit terms.
  • You should be collecting your debts within a reasonable timeframe. Businesses such as builders and advertising agencies which are paid in stages, and whose bills are often questioned, may not be able to use factors.
  • Too many small invoices may make factoring uneconomical.
  • Businesses whose sales are declining could find factoring difficult to justify.

1.2 Where credit limits are required by the factor, you and the factor must agree how they will be handled.

  • For non-recourse factoring (where the factor protects you against bad debts), the factor will usually set credit limits for each customer.The factor will use its credit system to determine their creditworthiness.
  • Many factors who offer recourse factoring do not agree credit limits.

1.3 Once you make a sale, you invoice your customer and send a copy of the invoice to the factor.

  • Most factoring arrangements require you to factor all your sales.

1.4 The factor pays you a set proportion of the invoice value within a pre-arranged time.

  • Typically, most factors offer you 80 – 85 per cent of an invoice’s value within 24 hours.You can obtain faster payment with electronic transfers. You may be charged.

1.5 The factor issues statements on your behalf and collects payments.

  • This includes contacting late payers by phone and cashing outstanding invoices.
  • You remain responsible for repaying the factor for bad debts, unless you have arranged a ‘non-recourse’ facility (see 2.5).

1.6 You receive the balance of the invoice (less charges) once the factor receives payment.

1.7 The factor provides regular reports on the status of your sales ledger.

  • You should expect regular statements.Many factors can offer you instant online account information.

BHP Infosolutions

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