Invoice Factoring Companies
Invoice factoring companies offer businesses a way to reduce their administrative burden and improve their cash flow by the sale of their debts. Once debts are sold to an invoice factoring company they will advance your business the money for the sale and take over the job of maintaining your ledger as well as chasing any overdue debts.
The two kinds of factoring available to businesses in the UK are recourse and non recourse factoring. Recourse factoring means your business retains the risk related to bad debts, so if customers have not paid after a set number of days the factoring company will request the money it advanced to be repaid. With non recourse factoring, the factoring company takes on the risk of bad debt and will be responsible for chasing it and any cost incurred such as legal action.
Many factoring companies also offer invoice discounting, which is similar to factoring in that it involves cash being advanced against invoices, but the difference is the original business is responsible for the administration of the invoices.
Finding an Invoice Factoring Company
Over ninety five per cent of invoice factoring companies in the UK and Ireland are members of the Asset Based Finance Association (ABFA) and a full list of these can be found on the ABFA website. Factoring services can either be provided by banks or specialised companies: businesses looking for a factor are not required to use their business banking provider for their factoring service.
Some factoring companies specialise in providing factoring services to certain industry sectors and some, such as the banks, have expertise in providing invoice factoring to many different types of business. When you are comparing factoring companies, the key factors to consider are how much do they charge for their service, what is the minimum notice period you will have to give to leave the service and what other terms and conditions do they have?
How Much do Invoice Factoring Companies Charge?
The charges for an invoice factoring company have two main parts, discount charges and credit management charges. If you have opted for non recourse factoring, then there will also be a credit protection charge. The discount charge is similar to an interest charge on a loan; it is a charge, usually between one to three percent above the base rate, which is charged on the cash that has been advanced until it is received by the factor. This charge is usually calculated daily and then charged back to the company each month. The credit management fee is the amount charged for managing the debts and maintaining the ledger and is typically something under three per cent of turnover. If you have opted for non recourse factoring, then the charge will depend upon the risk associated with your company, but is usually less than two per cent of the overall turnover.
How to Apply For Invoice Factoring
If you have decided that invoice factoring is suitable for your business, then you can apply to a provider for an account. They will send a factoring specialist to visit your company to asses if your business is suitable for invoice factoring. On this visit the specialist will spend time understanding your business, including what products you sell, how you invoice customers, details of your bad debt history, whether or not you have any overseas customers and if you offer warranties on your products. Completion of the process, from application to the factoring service being up and running, can take a couple of months, perhaps longer if you have complex payment structures such as stage payments.
