Summary of Factoring

 

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Summary of Factoring

Factoring companies only provide funding to businesses which offer it's customers the standard credit terms for the given industry.

If you are a growing business and you have outstanding invoices then factoring gives you the ability to raise finance based on the value of your debtors (account receivables). Factoring is a way of raising working capital rather than resorting to overdrafts or bank loans.

Factoring has the added benefit of outsourcing your sales ledger and debt collection commitments.

In this section we hope to guide you to a educated decision regarding your business finances by finding out........

Criteria

With a plethora of good factors in the UK and even though many have different criteria, they all want your business and will devise bespoke solutions for your company.

A typical factoring process

A factor will insist on auditing your company books and accounts to ascertain that predefined requirements are met by your sales ledger. Companies that earn more than £180,000 P.A are ideal candidates for a factoring agreement, although SME's (Small Medium Enterprises) or start up companies can get factoring with a turnover as little as £45,000. Having just a few customers can also increase your chances, as lots of small outstanding invoices are not considered inefficient, although, no single customer should make up more than "typically" 25% +- of your overall business.

Your debts should be collected within a reasonable time frame.

This is important factor no right minded factoring company wants to wait for YOUR outstanding invoices, they may take the onus on themselves to recover the outstanding debt and may also charge you for this.

Businesses such as construction, seasonal companies or agencies which are paid intermittently or in stages and whose invoices may be disputed, may not be able to apply for funding from a factor, although profit and turnover are the most important factor when negotiating a deal.

If your sales are falling with no immediate sign of improvement it could be difficult to find a factor that will support you, cash flow is the important "factor" to a Factor, you are relying on their services because you are "almost" guaranteed payment from your customers, you just need the money sooner to maintain your working capital.

If a credit limit is demanded by your factor, it is of utmost importance that this is agreed between you and your factor.

For non-recourse factoring where the factor has recourse to pay any outstanding or unrecoverable debts, the factor will put a credit limit for each individual customer and will use this to determine your customers credit.

For recourse factoring factors do not set a credit limit. If a sale is made, you send an invoice to your factor as well as your customer, To factor all your sales is usually a basic requirement with a factoring arrangement.

What do you get

A factors rates vary wildly much like Loans & Mortgages, it is impossible to say what return you will receive on your outstanding invoices until an agreement has been made but a factors offer you from 80 to even 95% of an invoice's value.

The factor pays your invoice value within a agreed time sometimes within 24 hours.

Quicker Payments

For an extra charge you can get even faster payment through the use of electronic transfers (phone, computer, telegraph etc).

Credit & Debt Collection

Liasing with late payers, tracking down outstanding invoices and issuing and re-issuing statements on your behalf will be the responsibility of your factor. You receive the balance of the invoice (less the factors rate) once the factor receives the outstanding invoice.

If you have not arranged a non-recourse factoring agreement you will be liable for reimbursing paying any outstanding debts to the factor.

The factor provides . Although many factors offer online account information. you should receive monthly breakdowns or statement on the current status of your sales ledger.

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