Debt Factoring
Debt factoring is sometimes called Invoice Factoring or Factoring. Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cashflow.
Factoring is offered to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders.
How Debt Factoring Works
After signing an agreement, the factor will typically agree to advance up to 85 per cent of approved invoices. Payment is usually made available within 24 hours. Usually all sales go through the factor.
Check the notice period to the end of the service – most factors require three months’ notice, but some require longer. Negotiate if you are not happy with the notice period.
Advantages of Debt Factoring
- Debt factoring provides a large and quick boost to cashflow.
- Debt factoring companies are often cheaper alternatives to loans and overdrafts.
- Debt factoring can be a cost-effective way of outsourcing your sales ledger.
- Debt factoring frees up time to manage the business better.
- Debt factoring assists smoother cashflow and financial planning
- Debt factoring often make customers pay more quickly
- Debt factoring offers useful information about the credit standing of customers
- Debt factoring often helps negotiate better terms with your suppliers
- Debt factoring is great for planning business growth
- Debt factoring means that cash is released as soon as orders are invoiced.
Disadvantages of Debt Factoring
- Debt factoring incurs a cots will mean a reduction in your profit margin
- Debt factoring reduces the scope for other borrowing because book debts will not be available as security.
- Debt factoring will restrict funding against poor quality debtors
- Debt factoring is not liked by all customers and they may prefer to deal directly with the business
Recourse Debt Factoring
In recourse debt factoring, the debt factor does not take on the risk of bad debts. Put another way, the factor will be able to reclaim their money from you if the customer does not pay. The debt factoring agreement will specify how many days after the due date for payment you must refund the advance.
Non-Recourse Debt Factoring
In non-recourse debt factoring, the factor takes on the bad debt risk. It accepts specified risks around the debtor’s failure to pay, but it does not insure against debts that are unpaid because of genuine disputes. Because of this, non-recourse debt factoring will be more expensive than recourse factoring.
- You never have to refund the advance to the factor, but you must pay interest to the factor for the period specified by the factoring agreement.
- The debt factor takes over all your rights to pursue the customer for payment. This includes the right to take legal action.
Please fill in our free online quotation form to receive a bespoke online debt factoring quotation for your business.
If you would like to know more about debt factoring invoice discounting fees call us on 0800 597 4757 or email us.
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