Are you in business and would like to know more about different types of business finance? Have you heard of factoring and think it might be for you but you’re not quite sure of what it involves and whether it would be suitable for your business? Take a look at our ‘Factoring for Dummies’ guide below:
What is factoring?
In your business, do you sometimes have problems with cash flow? Do you find yourself with lots of money owed you but sometimes struggling for working capital? It is this where factoring can be a big help to your business. Essentially it involves a factoring company ‘buying’ your invoices, managing your sales ledger and collecting the money owed from your customers. The process is simple, easy and efficient:-
- When you raise an invoice, the factoring company will buy the debt that is owed by your customer to you.
- The factoring company will then make a payment to you immediately of approximately 75%-90% of the invoice value.
- The full invoice value is collected from your customer.
- The factoring company then pays you the remaining balance.
- Your business pay the factoring company interest and fees. This will be different depending upon which factoring company used and your agreement with them.
What is a factoring company?
A factoring company is a financial services business that offers factoring services to its clients. A factoring company’s clients sell their invoices to the factoring company and they forward a percentage of the debt immediately to them. Businesses use factoring companies to ensure they receive cash more quickly than by waiting 30/60/90 days to receive payment from their customer.
An example of factoring
- Imagine your business is owed £100,000 by a customer.
- You sell the invoice to a factoring company for £90,000.
- They collect £100,000 from your customer and then pay you the remaining £10,000 you are owed.
- You then pay the factoring company the interest and fees that you owe as per your agreement with them.
What are the advantages of factoring?
- You no longer have to chase your own invoices/debts. The invoice factoring company do all of that for you, freeing up your time to concentrate on running and growing your business.
- You can free up vital working capital instead of having to wait 30/60/90 days for invoices to be paid.
- The factoring company may credit check potential customers ensuring that you are likely to trade with good customers who pay on time.
- You get instant access to working capital, instantly improving your cash flow.
What are the disadvantages of factoring?
- Because you don’t receive the full amount of your invoice (you have to pay the factoring company interest and fees) it does mean that your profit margin is hit a little.
- If you sell to the public, factoring may not be for you as most factoring companies will only buy invoices for commercial companies.
- You will have to use available ‘book debts’ as security. These may be needed if you are looking at other forms of business finance.
- Because the factoring company is looking after your debts and invoices, your customers will know that you are borrowing money on their invoices.
Having read this brief factoring for dummies guide if you would like to know more about factoring and how it could help your business then please don’t hesitate to contact Factoring Solutions for a no obligation chat on 01827 707680 completely free of charge as we never charge for our services.