Factoring

FACTORING is a good solution for a business to improve cash flow whatever the size of your business.

Factoring is a fairly simple process to understand. The Factor takes over your sales ledger and provides you with credit control and collection services for your outstanding debt.

When you issue an invoice, you inform the Factor who will normally advance your business with 80 to 90 per cent of the invoice amount.

The balance, less charges for the Factor service, is paid when the customer pays the Factor directly.

Your customer is notified of the use of a Factor, normally through a note attached to the invoice, and customers are instructed to send payment to the Factor, and not your business.

Funds can be released to you within 24 hours of issuing the invoice.

Costs involved in factoring are generally expressed as a percentage of sales factored and an interest charge for the cash advance.

The service charge - which covers sales ledger management, collection services and, as an extra if you ask for it, bad debt protection - can range between 0.4 per cent and 3 per cent of turnover.

Issues taken into account when determining the service charge are annual turnover of the company, number of invoices and number of customers.

There are a variety of advantages to invoice factoring. The primary one is the flexibility it gives your business compared to a traditional finance arrangement, which would be based on historical balance sheets.

With factoring, funding is based on your current and future trading levels and your needs, enabling you to plan ahead confidently, because you know that a fixed percentage of what you have invoiced will be available to you at any one time.

As a result, the up-front finance gives you a stronger hand in dealing with suppliers - perhaps benefiting from bulk purchase or prompt payment discounts.

You also gain easy access to credit ratings which will allow you to find out all you need about new customers, minimising the danger of bad debts.