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In the UK factoring is a method used by a firm to obtain cash that is tied up in unpaid invoices. A firm would use factoring to obtain the cash needed to accommodate the firm’s immediate cashflow needs and will allow the firm to maintain cash for working capital needs.

SME firm owners must learn that cashflow problems must be overcome quickly if a firms needs to purchase new material, pay salaries and compete with larger or more established firms Many SME firms consider a factoring facility to raise capital for short-term or ongoing needs. A factoring firm buys a business’s outstanding invoices, and gives then business a percentage of what it is owed up front (usually up to 85-90%). The factoring firm then collects the full amount of the unpaid invoice from customers and pays the business the balance it is due.

  • No credit checks are needed with factoring since the factoring firm effectively assumes the credit evaluation risk of customer that owe the outstanding amount on the invoice.
  • A firm would consider factoring when business cashflow options may not be available or not timely for firm requirement.
  • Up to 90% of an invoice value is available as an advance to most firms on an unpaid invoice. Please note that this advance percentage may vary due to account risk, industry, and factoring firm.
  • The factoring fee charged by the factoring firm for the factoring facility may also vary by actual risk in the account, industry, and/or factor firm.
  • Some factoring firm’s facilities may either be ‘recourse or non-recourse’. This means some business owners may need to consider credit insurance or personal guarantees in the event of a customer not paying a factoring firm.

Please note that factoring is an excellent source of funds that can enable a firm to grow. The factoring helpline will assess a firm’s individual needs and requirements including a focused evaluation of all actual or potential advantages versus the disadvantages & costs of factoring.