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What is Factoring
Factoring is the most recognised form of invoice finance. All businesses at some
stage can benefit from improved liquidity and cash flow. Factoring is the perfect
solution to enable a business to release cash tied up in the debtor book so it
can be used to gain commercial advantage.
Whether a business wishes to raise cash to support the growth of the business,
negotiate favourable terms with suppliers or simply remove the gap between raising
an invoice to receipt of payment in order to meet day-to-day cash flow requirements,
an invoice factoring facility can assist a business to achieve its objectives.
By eliminating the typical delay of anything up to 120 days before receiving payment
of invoices from your customers, factoring provides the essential cash flow your
business needs.
How does Factoring work
Factoring is very simple - all you need to put a factoring facility in place is
a debtors ledger of outstanding invoices which a funder can use as security to
advance your business between 80-95% of the gross outstanding invoice values.
Once an invoice factoring facility is up and running, each time you raise a customer
invoice you also provide a copy of the invoice to the factoring company who within
24 hours will advance your business the 80-95% agreed.
You are then free to concentrate on running and growing your business whilst the
factoring company takes care of the credit control function on your behalf. This
is especially valuable to businesses who have limited time or resources to dedicate
to payment collections and also for start-ups or smaller businesses where a sound
accounting practice has yet to be established.
Once the factoring company receives full payment of the outstanding invoice from
the end customer they then forward the remainder of the funds over to you after
making a deduction for their charges and fees.
What are the benefits of Factoring
Liquidity - The first and most valuable benefit is that factoring
provides an immediate improvement to your cash flow by releasing up to 95% of
your unpaid invoices.
Certainty - As funds are available within 24 hours of raising a
sales invoice, you can operate your business with the confidence that you will
have the cash flow necessary to manage your business on a day-to-day basis without
worrying if your customers will settle their accounts in a timely manner.
Scalability - Unlike other types of finance such as loans and overdrafts,
a factoring facility has the ability to grow in line with your sales.
Availability - Factoring is available to all sizes of businesses
including Start-ups, SME's and Large Corporate Enterprises.
Confidentiality - Some businesses prefer to keep it confidential
from their customers that they utilise a factoring facility - this is an option
that can be added to Invoice Factoring. Security - By including bad debt protection to your factoring agreement you have
complete peace of mind that you are protected against the risks of bad debts.
Affordability - When compared to traditional forms of finance such
as loans and overdrafts, Invoice Factoring is a well priced viable alternative
with added benefits.
Credit Control - As part of your factoring facility you also benefit
from the ability to outsource your credit control function to the factoring company
which leaves you free to focus on developing your business. Therefore you can
actually achieve savings in both time and money by passing on the sales ledger
management and debt collection activities to the finance provider.
Types of Factoring available
Disclosed Factoring - This is the most prevalent form of factoring
available. The term 'disclosed' means that your customers will be fully aware your
business is utilising a factoring facility. A disclosure notice is placed on all
invoices you issue to customers which informs them of the assignment of the invoice
to the factor. Any communication with your customers for credit control purposes
is done in the name of the factoring company.
Confidential Factoring - This is also known as Non - Disclosed Factoring
and refers to the way in which a factoring company communicates with your customers
when managing the credit control function on your behalf. Your customers will
be unaware that you are using the services of a factoring company as any contact
with your customers is done in your own business name. This is achieved by setting
up a dedicated telephone number so all calls are answered in your company name.
Recourse Factoring - This is the method most businesses enter into
factoring agreements. The factoring company will advance you payments against
your invoices for a predefined period of time, typically 60-90 days beyond due
date. Should your customer fail to settle the invoice at the end of this period
the invoice is re-assigned back to you and any funding against the invoice in
question withdrawn. The risk of non payment therefore sits with you the client.
Non-Recourse Factoring - By adding bad debt protection to your factoring
facility you are able to protect your business from the risks of non payment by
your customers. Many of the large funders will have their own bad debt protection
policies which can be added into the factoring agreement and some of the independent
funders will use the services of 3rd party insurers to provide the cover required.
Therefore providing you have issued invoices within agreed limits, in the event
a customer covered by the bad debt protection policy does not settle payment of
an invoice your business is protected from any recourse.
CHOC's Facility - If your business has a good accounting system
and can demonstrate a robust credit control process it may be possible to use
a facility known as CHOC's (Client Handles Own Collections) sometimes referred
to as CHOCC's (Client Handles Own Credit Control). This is a hybrid between invoice
factoring and invoice discounting and suitable for businesses who wish to retain
ownership of managing the collection of payments from customers.
Spot Factoring - Also known as Single Invoice Factoring allows a
client who may only need to use a factoring service on an ad hoc basis to take
advantage of quick injections of cash into the business when needed. Essentially,
you do not need to enter into any set length agreements but have the benefit of
factoring specific invoices as and when required. This is a great solution to
short term finance requirements as you can choose individual or batches of invoices
from your debtors ledger to factor.
Selective Factoring - Typically a standard factoring arrangement
requires the total turnover of all your business to pass through the facility.
With selective factoring you can decide which specific debtors you would like
to factor. So should you have particular customers with whom you have, for example
extended terms of business or who are consistently slow in settling invoices putting
undue pressure on your cash flow, you can decide to factor only these select debtors.
At Intelligent Factoring Solutions we are able to support and guide you through
the decision making process to ensure you find the right solution, from the right
funder at the right price. So call us today for a no obligation discussion on 01753 888 737. |
