Factoring

What is factoring?

It’s a way of raising finance for your business by selling your invoices. It allows your business to receive money quickly, while improving working capital and cash flow and reducing the need for time and resources spent on debt collection.

Factoring is a service offered by specialist companies, high street banks and other financial institutions.

Will Worldwide advise me about factoring?

Yes we will. Our independent commercial finance team can work with you to weigh up whether factoring is a solution that could help your business. Contact us using our enquiry form today and we will be glad to help you.

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How does factoring work?

Factoring involves you selling your invoices to a factoring company at a discount to what you expect to receive. For example, you build up a range of invoices which need to be paid by your customers. They are slow in paying and your cash flow cripples you so you need access to quick cash.

The factoring company will then lend your business a certain percentage of each invoice that you issue, collect the invoice when it becomes due and pay the balance back to you. You will be charged a fee, usually a very small percentage of the value of each invoice, and interest on the amount of money borrowed.

Could factoring help my business?

It will depend on the type of business you have, its size and customer base, and also on the circumstances of your business. Factoring will help you improve cash flow by turning debtors into cash. It is used by small, fast-growing companies as well as established businesses. Your independent commercial adviser will be able to help you decide if it can help your business.

What are the advantages of factoring?

The advantages are:

• It can provide a quick increase in cashflow

• There are many companies offering a factoring service so prices are competitive. Your business finance adviser should be able to find a solution that meets your cost and quality needs.

• It can save you time and money, because instead of chasing debts, you are able to focus on developing your business.

• It offers you protection against bad debts so that you can carry on your business.

In summary, factoring can protect your business from customers’ bankruptcy and provide fast payment against your invoices.

Will my business have to provide security to the factoring company?

Yes, the factoring company will take your unpaid invoices as security.

What’s the difference between recourse and non-recourse factoring?

Recourse factoring is an agreement where you retain the risk of bad debt. If the factoring company has not been paid by a customer, they can claim their money back from you.

With this type of arrangement, after money has been advanced the factoring company will set a date when they are due to be repaid. You will have to pay the fees and interest to the company regardless. However, it is cheaper than non-recourse factoring, may have fewer requirements and may be quicker because you are keeping the risk.

Non-recourse factoring is where the factor takes on all the risks, as well as all the rights associated with your invoices. Any advances made to you do not have to be repaid, even if the factor does not receive payment from your customer. The factor takes on the right to pursue your customer for payment and to take legal action against them.

Does factoring have any drawbacks or risks?

As with many financial solutions, there are risks and drawbacks associated with factoring. It is a complex, long-term agreement so always take legal and independent financial advice before entering into it. These are the risks and drawbacks:

• The costs may reduce your profit margin because you are giving up a part of the income you are going to receive from your invoices.

• Dealing with a factoring company may be off-putting to some of your customers who may prefer to deal directly with your business. Your customers may be upset that you are not dealing directly with them in regard to paying invoices.

• Your reputation becomes dependent in part on the reputation of the factoring company. This may disadvantage you if they do not operate to your standards.

• The factoring company may have an influence on your business that you are not prepared for, such as wishing to vet your customers.

• If you have bad debtors, you will probably have to pay more for the factoring service.

• Ending an agreement with a factor may be expensive and may involve you having to pay back any money advanced, even if your customers have not paid you.

• There may be the risk of fraud by in the form of fake invoicing and misdirected payments. However, insurance policies and audits can counteract this.

• The sharing of data could involve data protection risks or issues with IT security.

• It might make taking loans out more expensive and more difficult because your business will not have as many assets to use as collateral, because the factoring company has taken a charge over your sales ledger.

All the potential risks and drawbacks should be weighed up against the potential advantages. It may not be right for every business. Consider all your options carefully before entering into a factoring agreement. As your independent business finance adviser, we will help you to decide if this is right for your business.

How does factoring differ from invoice discounting?

With invoice discounting, the arrangement is similar in style to a bank overdraft – you are only paying interest on the funds you have borrowed. This means it’s slightly more flexible than factoring.

The credit management fees that you will be charged are also slightly lower because you retain responsibility for collecting payment. With factoring, you are ‘selling’ the rights and responsibilities of debt collection and credit control to the factor.

The other key difference is that with invoice discounting, your customers are not usually aware of the arrangement; it is between your business and the invoice discounting company.

Is factoring expensive?

Not necessarily. Costs will be in the form of interest rates and charges. You will pay administration and credit management charges either as a monthly fee or a percentage of the value of each invoice.

You will also pay interest on the amount advanced. Interest is calculated daily, with rates being generally equivalent to those of a bank overdraft and sometimes even more competitive.

If you choose non-recourse factoring (where the factor takes on the risks of the debt), there will be credit protection charges (which are a type of insurance cover) to pay as well. The amount will vary according to the level of risk the factoring company takes on.

We will shop around to find the best deals for you. Always consider the quality of the service as well as the cost.

Is there anything else I need to know about factoring?

If you decide that factoring is the right solution for your business, make it a positive financial strategy. Communicate to your staff and customers about the decision.

If you have any more questions about factoring for your business, contact us at Worldwide to speak to a dedicated and independent financial adviser. We will be happy to help you and initial consultations are free of charge or obligation.

Remember our Fee Guarantee: You won’t pay any fees unless we can help you.

Call your FT award winning independent financial adviser in confidence now on 0800 0112825 or complete the contact form and your dedicated adviser will contact you.