Factoring provides your business with cash, by allowing you to raise finance from the unpaid invoices owed to you.

For many businesses, outstanding sales invoices are their largest asset with up to one quarter of a business’s overall yearly turnover remaining unpaid at any one time. This “locked up” cash can greatly impact the growth potential of a business and may sometimes force a business into insolvency.

In addition, most smaller businesses do not have the resources and information systems to efficiently collect their outstanding invoices. Factoring can be a smart way to outsource debt collection and ledger management,

The mechanics of factoring

Step 1: You deliver goods or provide services to your customer

Step 2: You invoice your customer and send a copy to the factor

Step 3: The factor advances you the pre-agreed % value of the invoice usually the next day

Step 4: The factor collects the outstanding debt

Step 5: The factor takes their fees and then pays you the balance of the invoice value

Charges

Factoring charges are made up as follows:

service fee: The factor charges a service fee expressed as a percentage of the total volume of invoices factored which usually ranges from 0.5-3% depending on the volume and nature of your business.

interest charge: An interest charge is applied to the monies lent by the factor to you and compares favourably with overdraft rates.
An additional service which may be offered to you is bad debt protection. Bad debt protection allows you to protect yourself against the outcome of one or more of your customers failing to pay you for the services completed or goods you have delivered. This is generally charged at between 0.4- 0.7% of the value of the debt.