What is Invoice Factoring?
Invoice Factoring is a relationship when a Client (Business) sells its invoices to a Factoring company (third party). In return the Factoring Company will agree to advance an agreed percentage of the invoice in advance which is known as the prepayment. The funding made available by the Factoring Company can be used to assist with a Clients cashflow.
With Invoice Factoring when the debt becomes due the Factoring Company will then undertake the credit control function to collect in the debt.
What is the difference between Invoice Factoring and Invoice Discounting?
Invoice Factoring is a process where the Factoring Company is responsible for the credit control function to reclaim the amounts due from a debtor. This is the key difference between Invoice Factoring and Invoice Discounting.
Invoice Discounting has the same benefits as Invoice Factoring, however, it does not come with a credit control function and therefore the debtors should be unaware that the invoices have been funded by the Factoring Company. As there is no contact made by the Factoring Company to the debtors this type of service is often referred to as Confidential Invoice Discounting.
How much does a Factoring company charge?
There a number of parameters which a Factoring company will use to calculate the charges of a Factoring facility. The key items for consideration are
- Risk – All lending is provided with a risk and each funder will ascertain the risk profile of their Client. The higher the risk the higher the charges will be
- Workload – All funders will look at the debtor profile and will charge fees accordingly. The fees will be lower if the workload is lower eg a debtor profile of 5 debtors compared to one with 5,000 debtors.
- Experience – The length of trading time will have an impact on cost. A funder will prefer a Client to have experience of trading over a new start up business. This links to point 1 where the risk will be higher for the new start up business – therefore leading to higher charges.
In our experience a very experienced business trading at £10million per annum could expect to pay c0.10% per invoice, however, a new start up business could be expected to pay up to 5% per invoice in fees.
How do Invoice Factoring companies make money?
The invoice Factoring Company makes their money by charging an agreed percentage against any invoices they agree to fund. This is known as the Service Charge. The Invoice Factoring Company will also make additional charges for any sums borrowed and any other costs incurred to administer the Invoice Factoring account. E.g prepayment charges, increased facility charges etc.
The fees are usually taken on a monthly basis which allows a Client to budget accordingly. Most Factoring Companies if not all provide online access to the account. This will show how the account is performing and what fees are payable.
If you are interested in Invoice Factoring or Invoice Discounting please do not hesitate to contact us on the details below:
Office Tel 0161 821 1478
Mobile 07771 430 740
Other specialist areas of funding are
- Asset Based Lending
• Asset Finance
• Business Loans
• Cashflow Finance
• Invoice Discounting
• Single Invoice Finance
• Trade Finance
• Stock Finance
• Credit Insurance