What is Invoice Factoring?
Invoice factoring is way of businesses improving their cashflow and reducing administration burdens through the sale of a company's invoices to a third party. Factoring is only used if your business sells to commercial customers. It is not suitable if you sell to the general public. The factoring companies allow you to draw down money against the amount owed to your business, manage your ledgers and perform collection activities. Invoice factoring is different to invoice discounting as in the latter the business retains control over the administration of the ledgers.
There are two types of factoring available, recourse and non recourse factoring. The difference between the two is that in recourse factoring the business retains the risk of bad debts. This means if customers default on their debts, the business will need to repay the advance they have received from the factoring company. Non recourse factoring is a more expensive service than recourse factoring due to the higher risks faced by the factor.
Invoice Factoring Companies in the UK
Invoice factoring companies can be part of the operations of high street banks or they can be specialised independent factoring companies. In the UK, banks offering invoice factoring services include HSBC, Lloyds TSB, Bank of Scotland, and Barclays amongst others. There are then a number of national and regional factoring companies including Bibby Financial Services, GE Commercial Finance and Hitachi Capital.
If you already have a business banking account, you do not have to use that bank to provide your invoice factoring services. The invoice factoring companies offer a range of services to customers; some specialise in certain business areas such as construction and all have different terms and conditions. To decide which of the UK invoice factoring companies in the UK is best suited to your business, you will need to contact a number of companies to get quotes and details of their service.
The Cost of Invoice Factoring in the UK
In the UK, fees for invoice factoring are made up of a number of different components including discount charges, credit management fees and additional costs for options such as credit protection. The discounting fee is usually calculated daily and charged each month and work in a similar way to bank interest on the amount advanced. Typical rates are between one and three per cent above the Bank of England base rate. The credit management fees are the charges for administering your account, and are usually somewhere between one to three per cent of the turnover. Credit protection fees relate to non recourse factoring and will depend on the factor's assessment of the level of risk your business provides. Credit management fees tend to be anywhere up to two percent of turnover.
Finding a Factor
To find an invoicing factor in the UK, one of the first points of call should be the website of the Asset Based Finance Association. ABFA is the trade association of factoring companies in the UK and Ireland and represents over ninety five per cent of the factoring business in these countries. Their website has a full list of members as well as a frequently asked questions section to help you choose a factoring company for your business. It also has details for other finance options that its members provide such as asset based lending.
