What
is factoring?
If you own a small to medium business
and you rely on customers paying
invoices within a 30 day period
for your working capital, your cash
flow is effectively tied up in those
invoices. This limits growth and
can cause problems when paying staff
and suppliers.
Factoring is the process of releasing
cash from invoices as soon as they
are issued, allowing you to put
the money to work where it is needed
most.
How
Factoring works
1. The client sends his customers
invoices for completed work.
2. The client sends a batch of copy
invoices to the factor.
3. The factor pays up to 90% of
the invoice values to the client.
4. The factor runs the sales ledger
- telephone/statements.
5. The factor collects payment from
the customers.
6. The factor pays the balance,
10%, less charges, to the client.
Obviously in most cases there will
be an existing sales ledger in place
at the time when a factoring agreement
commences. In this case the factor
can make available funding of up
to 90% of the qualifying book debts,
which in many cases can provide
a healthy cash injection, even when
existing bank overdrafts have to
be repaid.
There are two main charges in a
factoring agreement :-
1. Service Fee - This is a percentage
charge on the clients actual turnover
; usually 0.5% to 3.5% of invoice
value.
2. Cost of Money - This is an interest
charge on the funds advanced by
the factor ; usually 1.5% to 3.5%
over bank base rate. This charge
is usually quite competitive when
compared to bank overdraft rates.
Criteria Guidelines
The items below are not exhaustive
and it is obviously always the factor
who will make the final decision
on what is suitable for them or
not :-
1. Suitable for Sole Traders, Partnerships
& Limited Companies.
2. Turnover range £40k up
to £20m
3. New Start businesses are a growing
sector
4. No minimum accounting criteria,
both loss making and negative net
worth businesses will be considered.
5. Ideally 5 to 6 live customers
on the ledger preferred, but there
are factors who will consider single
debtor ledgers.
6. Funding levels usually vary from
50% to 85% of invoice value, but
in some cases up to 90% can be available.
7. Trade credit sales only can be
factored not debts to the public.
8. Factoring can be provided with
debt insurance.
9. Both UK and export debts can
be funded.
10. Phoenix situations and CVAs
can be considered.
11. The range of factorable industries
continues to increase so please
call us for up to date information
on whether your own is suitable.
Other considerations
More than many forms of finance
it is important to understand the
full detail of the quotation rather
than just the headline rates.
Some of the areas that can affect
the actual amount of funding you
receive include; credit limits,
concentration or high involvement
policies, timing of age disapproval
and contra trading.
Some of the areas that can affect
the overall cost of the facility
include; refactoring charges, minimum
annual fees, charges per invoice
and money transmission costs.
In addition to the above there are
general issues, which include; length
of contract, length of notice to
terminate and level of security
required.
It is in helping to explain these
areas and outlining the different
options available to you, that we
feel we can provide most added value
