There are two basic types of Factoring in use today; Full Factoring & Confidential Invoice Discounting, both of which are governed by a written agreement. The agreement typically lasts for 12 months and automatically rolls over, subject to review. Termination of the agreement can be effected by either party giving 3 months written notice to the other. The choice of product is determined by the client’s requirements, subject to the factor’s approval, whilst both products provide an advance payment against outstanding invoices.
Factoring: Prior to commencement of the facility the factor will enter customer name and address details on to its computer system. Details of outstanding invoices will then be posted to the individual customer accounts. The factor will issue statements of account to each customer, along with a letter from the client which introduces the factor as the legal and beneficial owner of the debt and give details concerning future payments. When funds are required the client may then request an advance payment equal to a pre-agreed percentage of the value of outstanding book debts. The client will ensure that a printed Notice of Assignment, detailing the factor’s rights, appears on all future invoices and forwards copies to the factor for processing, thereby increasing the level of available funds. The factor will undertake all credit control functions and, on collection of debtor payments, will allocate cash to the individual debtor accounts on its ledger. Receipt of debtor cash releases the balance of the invoice, less the level of the previous advance. The factor furnishes the client with regular in-depth ledger information and a statement detailing the month’s transactions.
Confidential Invoice Discounting: This product involves the factor entering the total of the client’s on to its system as a single figure. As with factoring, the client may then request an advance payment against outstanding debts and will continue to notify the factor of sales batch totals on a regular basis. The confidentiality of the facility dictates that the client undertakes its own credit control. Customer remittances are paid into a trust account, whereupon the factor processes the cash to create additional availability. The client is required to maintain a Control Account, which details all transactions and this document is sent to the factor on a monthly basis, along with a copy of the client’s month-end aged debtor analysis.
Generally speaking, most factoring and discounting facilities are offered on a recourse basis, i.e. the responsibility for bad debts rests with the client. Non-Recourse facilities are however available and involve the factor providing credit insurance against the failure of the client’s customers.