A UK factoring company will normally take minimum 10%+ of the invoice value, and an interest charge on the "factoring loan" may be demanded when the account is settled. This is all part on a factoring agreement
Does your business or SME qualify for factoring?
* Do you sell to other businesses which have good credit (Government Bodies, Schools hospitals etc.).
* Are you invoices outstanding (orders or services completed).
* Typically £180,000+ Annual turnover (some factors may consider start-ups and SME's).
* More than several customers (No single customer should account for more than 1/3 of the companies turnover.)
* Payment terms | Periods of credit must be the norm in the associated industry
Businesses unsuitable for factoring
* Your business sells to the public.
* You have a majority of small invoices.
* There are a large amount of disputes/queries.
* Your customers make part payments or periodic payments.
WHAT IS FACTORING?
When traditional forms of lending are out of reach or not practical for your company factoring is an ideal solution this gives you a better scope and ability to maintain your working capital.
One of the first signs of an economy slowing down or showing signs of recession is a slowing down of a business's cash flow so if a business does not have a procedure in place to raise additional working capital may be in for a tough time when their receivables begin to slow down.r Factoring enables you to turn your outstanding invoices into real money, and is a proven way of converting liquidating receivables.
- Recourse Factoring - If a customer fails to pay after your factor has paid you then you will be liable for recourse, in other words you still owe the money.
- Non Recourse Factoring - the factor will be liable if a customer fails to pay.
- Confidential Factoring - With this deal the customer is unaware of your factoring agreement.
- Invoice Factoring - Invoice discounting and factoring are financial tools available to all companies
- Business Finance - Factoring is an alternative way of raising funds for your company.
- Working Capital - This is the money your company can freely spend, factoring can help improve your situation eliminating the need to wait for quarterly customers to satisfy their invoices.
- Invoice Factoring - This is mixture of both factoring and invoice discounting.
- Credit Control - A factor can take control of this or you can keep it in house.
- Debit Collection - Factors can take on this responsibility saving you working hours.
- Commercial Finance - The same as business finance.
- Invoice discounting - This is mainly for larger companies with established customers.
- Accounts receivable - These are outstanding invoices you factor can claim of a customer.
Credit at most commercial banks is becoming less; this can leave a business with few available alternatives for improving their financial standing in time of difficulties.
The process of factoring carries an important function in that it allows easy cash-flow for organisations that may otherwise be in a situation where they may suffer payment problems.
Services usually work on a percentage where they take a percentage of the total invoice value. A good example of this would be to take a hypothetical situation. Take for example a business factors a £100 pound invoice; the factoring company will pay on average of about 95% of the total invoice value retaining about 5 %. This has a benefit for the borrower in the sense that for a small fraction of the cost they are alleviated of the burden of any financial constraints associated with waiting for invoices to be paid.
Why does a business need to factor its invoices?
For a business providing products or services to other businesses, you are usually financing the purchase until the outstanding balance has been paid, most payment terms range anywhere from 7 to 120 days, but businesses are like people and will hold of paying as long as possible.
The decision to replace the bank overdraft with factoring can be an important step for your business so it can operate with or without limitations imposed by traditional banking methods.
Start Factoring
Factoring, invoice discounting, means getting finance for growth, working capital and improved cash flow for your business. Funding, invoices and sales ledger credit control, relieve bad debts as do factors and asset based lenders, without jeopardising your current assets also for trade debts and debtors
Please note that all information contained on this website has been prepared with diligence and is believed to be accurate although it does not constitute professional advice. We cannot take responsibility for any decision you make following your visit to the F.I.D UK - Factoring & Invoice discounting website.
The Costs
The two main fees when it comes to factoring are twofold
- service fee
- interest on the amount received from the factor.
Service Fee
Outsourcing your sales ledger to the factor is included in this fee which includes these services :-
- Presenting invoices to your customers.
- Credit checks on your companies.
- Credit Management.
- Retrieving payment on outstanding invoices.
The service fee is a percent charged against your turnover. The fee usually varies from 1.5 to 3 % over base rate. taking these resposibilities from your company time can help you run your business and releases you from chasing up non payers. Credit control management, administration charges, and the running of your sales ledger, are related to your annual turnover.
- Your companies annual turnover.
Typical fees range from 0.70 to 3.0 % of turnover.
- The amount of current and outsatnding invoices.
*Typical fees may be as little as 1% if you have £1,000,000 turnover.
- The total amount of customers that you have. (no one cutomer should account for 25% approx of your business
Interest Charge.
The factors base rate usually comes into line with the Bank of England's base rate and the interst charge to you is proprtional to the amount of the invoice the actual % is the same or cheaper than a bank overdraft (after all you are providing security).
*For invoice discounting, 0.15 to 0.7 % of your companies annual turnover.
Non-recourse factoring protects your business against bad debts which can incur credit protection charges your factor with quantify the risk associated and charge accordingly.
The Advantages
Cash flow and funding - Ultimately You maintain your working capital and maximise your companies cashflow.
As opposed to an overdraft which could raise maybe 40-60% of the outstanding invoice, factoring can raise over 80% on your outstanding invoices. Overdrafts, mortgages and secured assets used to obtain loans, also have to be continually re-worked costing you time and money.
You can arrange a preliminary "credit line" which increases as your business improves.
Because a factor can take the responsibility of recovering debt and outstanding invoices a factor can save you time, better spent on running your own business. A factor can also take control of your sales ledger unless you go for invoice discounting.
You can take advantage of the factor's credit control system to help assess the viability of any potential customers or check the credit rating of your current customers. This helps you make informed decisions about your companies trading options.
Non-recourse factoring protects your business against bad debts.
Export factoring can reduce the risk of doing business overseas, exporting to other countries and receiving payment in other currencies, hopefully your factor will have some experience branches or contacts in a designated region, and enable your transactions to run smoothly.
The Disadvantages
Rushing into a factoring deal, not being truthful or not keeping your companies interest at heart can tie you into a factoring deal that could have an adverse affect on your business, if you need factoring you are probably in a precarious position anyway, so doing your research properly or by using a competent factoring broker can make you agreement much more successful.
Customers & Sales
In most cases the factor will take control over your sales ledger (books). This can be a bit awkward as you may have a personable relationship with your customer who now has to deal with your "unknown" factor, in some cases your customer may assume that your business is in trouble and may not want to trade with you. With careful discussion with your factor you can explain your customers method of payments and collection, and providing they have a good credit history their billing terms can remain unchanged.
Regulation of your business
the way you do business may be affected by factoring, because some factors will want to asses your customers creditworthiness and apply credit limits to that company especially if they have delayed payments or have outstanding invoices, this is typical of Non-recourse factoring which protects your business against bad debts ( the factor has recourse to cover any outstanding debts).
If your company is is not sufficiently large enough to qualify for invoice discounting, a debt collection service will seem your only real benefit. companies that have an annual turnover of at £500,000 or more can qualify for invoice discounting, meaning your are in control of tracing and recovering outstanding invoices.
Get me Out!!!
Most deals made by factors tie you into a deal for at least 12 months in most cases, repurchasing your sales ledger or changing factors (like a re-mortgage) can be the only effective route when it comes to ending a factoring agreement.
No more Factoring
If and when your factoring deal ends be sure that your company can replace it's working capital for the first initial period, getting used to frequent payments from your factor can breed apathy, you may need to find an alternative form of funding in the early post-factoring days.
The UK Market
The number of companies that use factoring and invoice discounting in the UK rose again last year (2009) as companies continued to move from the much hated overdraft to the much more flexible method of factoring.
The Republic of Ireland has also seen an increase in factoring services.
To demonstrate the importance of the UK invoice finance market most accountants now see factoring as a more appropriate method for growing companies and small-medium-size-enterprises (SME) clients than a bank overdraft or a term loan.
The UK has a number of factoring companies
Tips for finding a good factoring company
* When you choose your factor you always check the terms and conditions.
* It pays to shop around when choosing a factor as conditions vary dramatically.
A good Factoring company can help generate immediate working capital which reduces the pressure on your businesses cash flow. Linking funding to sales helps your business to grow without the financial constraints caused by late payers.
Good factoring can also reduce time and money spent on credit control and debt collection.
Factoring (invoice factoring) is an alternative way to get to the tied cash your company has because of unpaid invoices. Factoring leaves your company in a better financial position. If a factoring company fulfils its obligations you will be able to concentrate on "your" business without any distractions.
Look for factoring companies offering
* Accounts Receivable Financing,
* Invoice Factoring,
* Invoice Discounting,
* Working Capital Financing
A factoring company is a commercial organisation that deals in finance in exchange for invoices obtained from companies. There are many costs that are occurred in the provision of a factoring service however fees generally vary from company to company and from business to business. The cost is also determined by other factors such as invoice size, the amount of invoices and the payment length. All in all what can be ascertained from the latter is all companies have varied costs and all deal in different ways which is sometimes reflected in the cost. In the UK factoring companies provide millions of pounds of finance each year to organisation who may be suffering from cash flow problems. The way a factoring company will usually work is that they will pay a large part of an unpaid invoice in advance in exchange for a cost or commission. The history of service usually depicts the availability of this type of service for large blue chip organisations however in today's finance haven the service has been extended to small to medium enterprises. It can be concluded in regards to the aforementioned that factoring companies have filled the void that banks have created.
What factoring allows companies to do is enable it free it’s tied up money. Since there is a common norm for invoices to be paid within 30 days, the factoring company allows organisations to obtain their money within 24 hours. A Factoring company can help an organisation stay current with its vendors and other financial duties such as payroll and taxes. In relation to other finances such as loans and commercial mortgages which usually a requirement of 2 year accounts, in relation to these factoring is quite easily available. The service of factoring is also extended to business that is relatively new thus making finance easy to obtain.
There are many advantages to consider a factoring company. However there are several factors that need to be considered.
Here is a summation of these pointers to look out for:
*Look for organisations that offer quotes readily. This shows that they are not afraid of the competition
*Make sure there is a time frame given to from invoice shown to invoice delivery.
*Always deal with companies that have the relevant experience and those with experienced brokers. This will help you gain the customer service you desire
The above details the information explaining briefly how the factoring companies work and the processes involved.
Use Factoring as an Alternative to Small Business Loans, Asset Based Lending or Working Capital Loans
There are many ways of sourcing capital such as
* Asset based lending
* SBA loans (Small Business Administration)
* Working capital loans
* Small business loans
Factoring and invoice discounting was not usually available for small medium size businesses. Most companies that were eligible for factoring already traded with commercial customers and government bodies such as hospitals or schools who were automatically considered to have excellent creditworthiness. This is all a factor needs to suggest a program for a Small/Medium Enterprise (SME).
Some companies have responded to this lately and don't mind if your company's credit is adverse or immature, usually the creditworthiness of your customers is all you need to get the working capital you need for your business.
Other factors not considered
* Record of profitability
* Positive net worth
* Hard assets for collateral
Concentrating on running your SME business is the net result of using accounts receivable financing, invoice discounting/factoring, for your Small/medium business.
D.I.Y. Factoring
If you do want to keep control of your negotiations it is advisable to contact more than one factoring company before you make a tie yourself to a factoring agreement.
Ask the questions.
Be sure to study all the offered by factors are suited for your business and most important are affordable.
Find out how your factor's credit control system operates.
Some factors may want to check or even make depictions about any future customers, so find out the factors policy about this
A factor want to set credit limits on you or your customers make sure these restriction are viable.
Find out the charges for credit protection & credit management
Make sure any charges are reduced as your turnover improves
Preliminary audits of your outstanding invoice may also carry a charge, find out if this is the case .
Finding a factor
There are many factors operating in the UK mostly independent of banks (the Royal Bank of Scotland offers factoring services)and most can be found at the Factors and Discounters Association.
Services
* Immediate cash. You can receive your cash 48 hours after purchasing an invoice.
* Credit management & Debt Collection services. Professional collection services can be carried out by a competent factor they will set the necessary credit limit for each outstanding invoice, this saves you time and can also reduce your credit costs.
* Foreign receivables factoring (Export Factoring). Sales to customers overseas, including invoices in foreign currencies other than sterling, can also be included in a factoring agreement.
* Non-recourse purchase of outstanding invoices. To reduce your risk a factoring company will assume the credit risk of the invoices purchased.
* Term of Contract and termination clauses. A typical contract with a factoring company runs 12 months or more. After the initial term, contracts can be terminated - there are no set rules, read carefully (varies from notice periods to contract anniversary). Termination is always subject to full repayment of the funds.
* Trial period. Some factoring companies have a trial period when you begin using their services: "if you don't like it", you can end the contract after the first few months. Termination is always subject to full repayment of the funds.
* Reputation and references. The factoring company will be a critical interface with your customers. Make no compromises. Work with a reputable firm to eliminate all risk of negatively influencing your customer relationship. Ask for references. Check if the factoring company is a member of the Factors and Discounters Association.
* Personalized service. Particularly if you are a small company, make sure to have a customer service team available for you.
* Exports factoring capability. If you export make sure the factor has its own network, or affiliate partners, in your customer's country to provide on the spot collection.
* Bad debt protection. Some factoring companies offer this additional service, some don't. Ask!
* Chose the factoring company according to your customer profile. Whether your customers are other businesses or individuals is an important criterion in choosing your factoring company.
* Transfer restrictions of your outstanding invoices. Make sure there are no existing contractual arrangements disallowing the transfer of your outstanding invoices to a factoring company. For example a loan that is secured by your outstanding invoices.
* Information requirements to open an account with a factor. The factoring company will ask you to fill in an application form and provide additional documents and accounting statements you would also typically give to your bank when taking out a loan. Be prepared to give a detailed overview of your customers, and if you request bad debt protection, their risk profile. Competitive terms . Rates charged are usually between 70% and 95% of invoice amount.
* Notification and Non-Notification Factoring Services
* Collection Factoring
* Non-Notification Factoring
* Export Factoring
* Reverse Factoring
Other Factoring Services
* Recourse factoring
* Non-Recourse Factoring
Factoring & Invoice Discounting | Invoice Discounting | Recourse & Non Recourse Factoring | Export Factoring
Related Factoring Websites
The Factors and Discounters Association
Business Link - Debt factoring and invoice discounting: the basics
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