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The Essentials of Factoring and Invoice Discounting

As many businesses do, you may find yourself operating perilously close to your overdraft limit on an almost daily basis with the stress of cash management taking its toll. You are stressed and you feel like your business cannot grow whilst being restricted by its cash flow problems. You have considered a bank loan but maybe something else would be more suitable- maybe factoring or invoice discounting is the answer to your prayers?

First of All - What exactly is it?

Both factoring and invoice discounting involve passing your debt on to a factoring company who then release a percentage of the value of the debt to you immediately. The percentage can be as high as 90% but this will depend on the factoring company you use. This means you effectively have most of your sales paid straight away by the factoring company.

What is the difference between factoring and invoice discounting?

The main difference is the control over the sales ledger. Factoring your debts will mean that you hand responsibility of your credit control over to the finance company. In invoice discounting, you retain responsibility over chasing debts. In both cases the finance company will pay you a percentage of the value of your invoices.

Do I keep the risk of my debts going bad?

Factoring companies can offer to take on the risk of the invoice going unpaid as part of the service, which is known as non-recourse financing. Should a customer not pay an invoice, the factoring company will bare the cost. This is not the case however if there is a genuine dispute. Non- recourse financing is more expensive than recourse financing.

Is it suitable for my type of business?

New businesses without a trading history who don't qualify for other sources of lending may find Factoring/Invoice Discounting to be the solution to their funding needs.

Also companies working on tight margins with long credit terms to customers may require quick access to funds on a regular basis.

Companies who operate a cash-based or retail-type business do not usually qualify.

The Positives

The Negatives

Anything else I need to take into consideration?

Many factoring companies have online portals to enable their clients to add information from their sales ledger. The invoices are added per client and then once the invoice is processed a percentage of the sales invoice is paid into your account. The process is quick and easy and can encourage you to raise sales invoices in a timely manner.

For companies operating a cash accounting system for VAT, the invoice is classed as paid when it is settled with the factoring company, not when you draw down the cash. Therefore you still retain the benefits of using cash accounting.

Competition between banks means that if you shop around you can get a good deal.

The Asset Based Finance Association (ABFA) is a body which gives a list of the Factors and their conditions. This is a good first port of call. There are comparison websites for factoring which can compare the various lenders. This could also save a lot of time.

You could also speak to your local business forum or Chamber of Commerce as they may have deals for members that would offer even greater savings.

How we can help you

Speak to us first. Consider whether you really need factoring or perhaps an alternative kind of finance would be more appropriate.