Questions To Ask When Considering Factoring
- What is factoring? It is an arrangement between a factoring company and a business whereby the factor provides between 75% and 90% cash available against the unpaid invoices of a business. It also relieves the burden of routine tasks such as sales ledger management, credit control and credit checking.
- How can it help my business? Factoring can create immediate extra working capital, by advancing cash either the same or the following day against invoices it receives. It also allows the client to concentrate on sales and production functions as the factor takes care of the credit control process.
- Why would I need factoring? If your business has inappropriate or inadequate financial facilities, a rapidly growing order book or suffers from late payment from debtors, factoring could meet your cashflow requirements.
- What is the difference between invoice discounting and factoring? Both facilities provide immediate cash against invoices. Invoice discounting is generally a confidential facility where the client continues to run its own sales ledger. A factoring facility provides a full sales ledger and credit control service.
- What is the difference between recourse and non-recourse factoring? Factoring clients can protect themselves against bad debts with a non-recourse factoring arrangement. The factor will cover the client for bad debt losses up to an agreed limit for each customer. With recourse factoring any bad debt is the responsibility of the client. Naturally there is an additional cost to the client for non-recourse factoring.
- Are any types of businesses unsuitable for factoring? Yes. Factoring can be used for a wide range of businesses offering goods or services on credit terms. However, some types of businesses such as those involved in stage payments or long term contracts, as in the building industry, are unsuitable for factoring.
- What criteria must my business satisfy to be funded by factoring? Factoring companies will require a minimum turnover of F-50k per annum but there is usually no upper limit. Start up businesses will be considered if they have a satisfactory business plan.
- What security is required? Generally a factoring agreement between the client and the factor covering purchase of debts by the factor, in addition to personal guarantees/performance warranties is all that will be required. Occasionally a debenture over book debts or guarantees from associate/parent companies will be necessary.
- Can I retain my banking facilities? Yes. Factoring does not disturb an existing banking relationship. However, it is likely that any existing overdraft facility will be reduced on the commencement of a factoring relationship but the reduction will be more than compensated by the additional cash made available against invoices by the factor.
- What about the relationship I have with my customers? While the factoring company will be in direct contact with your customers, they may welcome your continued involvement in the collection process. In addition, a factoring facility enables the client to enter into additional sales contracts with far more confidence.
- How can I keep up to date with daily changes on my sales ledger? Daily transactions are advised on paper and some factors provide a direct modem link between the factoring company and the client who can view their own sales ledger movements as they happen. Any disputes are also notified to clients immediately.
- How much is factoring likely to cost me? Typically the charges will be in the range of: Service Charge: 0.4% – 3.0% of turnover Funding Charge: 1.75% – 3.0% over Base Rate. A business turning over Elm with 50 debtors and 1000 invoices per annum would expect to have a factoring service fee of well under 1.0% Service fee charging will depend upon the workload on the sales ledger.
- Can you factor your exports? Yes. The factoring company can collect your export debt whether they are invoiced in sterling or local currency. Most factors, often using factoring companies in the country of import, have the ability to collect the debt in the local language of the debtor and understand the collection process and legal system for collecting debts. An additional charge is normally applicable on export debts.
- What benefits will factoring provide for the future prosperity of my business? Provides immediate working capital, helps to solve cashflow problems, provides headroom for growth and frees up valuable management time to enable a business to maximise its full potential and enhances ownership value.
- Are there many providers of factoring services? Yes. Well over 40.
- How do I choose? Have a short list covering the following topics: Experience; financial strength; speed of payment and processing; attitude towards client; involvement in collections; flexibility of computer system; ability to provide computer link; export handling; charges.
- If you would like to know more about factoring please contact us
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