What is Factoring?
Quite simply Invoice Factoring is when a business sells it’s invoices to a third party (a factor, lender, or factoring company) in return for an advance payment.
The lifeline for any business is cashflow and by selling it’s invoices a business can then pay wages, bills and suppliers without the worry of waiting to receive payment.
Invoice Factoring is provided by most high street banks and by over 30 independent providers. Each provider may call it a different name but essentially it is the same product. See below for the different terminology.
- Invoice Factoring, Invoice Finance, Spot Factoring, Selective Factoring.
All Star Funding Solutions has relationships with all the key providers across the UK and can source the ideal solution for your business.
So how does it work?
Up until an invoice being raised there is no involvement by the lender. It is only once an invoice is raised then the additional steps become active.
A lender is able to finance all invoices raised by the business. This is quite simple as all lenders operate online account systems. It is basically a case of attaching an invoice to the system or doing a bulk upload.
Each agreement is different for each business. In the main a lender will usually advance between 75%-85% of the invoice value up front less their fees (usually below 5%)
The debt will remain outstanding as per the terms set by the business. Once the debt becomes due then the lender has the right per the agreement to start their credit control duties.
Upon receipt of the payment by the debtor the lender will then take back their initial 75%-85% and the remainder is then paid back to the business.
What are the Advantages?
The main advantage of a Factoring facility is the improvement in cashflow which it provides. The ability to turn credit terms into an instant payment is often priceless.
In some industries being paid on time is crucial to a businesses ability to trade e.g Recruitment, Haulage, Manufacturing. A number of industries often require significant up front payments to be made to complete the work prior to being paid.
Many businesses see the credit control function as a key advantage. This enables a business to distance themselves from the collection side of the business. If a third party is completing the credit control then this takes pressure of the business and they can concentrate on other duties e.g sales.
If a lender is able to offer a full time credit control service this can save time for a business. It can also save costs as there would be no need to employ a full time credit controller as this is offered as part of the facility.
What are the Disadvantages?
The most common disadvantage is the “stigma” of factoring. We have covered this in detail in a previous blog – see https://www.allstarfunding.co.uk/factoring-myths/
Minimum commitment – The contract period is often a minimum of 12 months. We are however, noticing some lenders reducing the minimum period to 1 month. This does seem to relate to only a small percentage of lenders.
In most cases a lender will require all sales to be notified throuh the facility. This is required to maintain visibility over the debtor profile and the sales. It could be that not all invoices require financing and therefore a fee is being charged on something that is not required. Again there is a small number of lenders where you can pick and choose the invoices to be notified.
If you have never used Invoice Factoring before then the fee structure can be complicated. At the outset this needs to be explained by the lender but it is usually discussed with the owners of the business and not the administration team.
We would recommend discussing the fees with a broker as often lenders will omit fees from their initial conversations and add these at a later stage (often classed as disbursements).
Free Advice / Free Quotes
Over at All Star Funding Solutions we are able to provide advice as to the suitability of Factoring for a business. We are also able to provide Free Quotes.
Factoring is not suitable for all businesses. We often come across businesses that have been mis-sold Factoring as a solution to their cashflow needs.
If a business is able to complete their own credit control we would recommend looking at an Invoice Discounting facility. This is exactly the same type of facility but without the credit control function.
Factoring is on a slow decline as many businesses choose to use an Invoice Discounting facility. These types of facility are often cheaper facilities as they do not include the costs for additional credit control.
As at Q2 2018 around 15,000 businesses in the UK currently use factoring (http://www.abfa.org.uk/news/statistics.asp)
For further information please see our main product page.
https://www.allstarfunding.co.uk/invoice-finance/ or call us on 0161 8211478