Factoring is more affordable than most companies realise – and far more flexible than an overdraft facility.

The two basic fees paid to the factoring company are: the service fee and interest on the amount advanced:

• Service Fee. This fee represents the cost of outsourcing to the factor your sales ledger management. For this fee the factor will issue your invoices, perform credit checks and install credit control, follow up and chasing of customers. The service fee is a percent charged against your turnover. The fee usually varies from 0.5% to 3.0%. Some of the services the factor may perform may be not feasible for you to do on a regular basis and this may improve the speed of payment and decrease the chance of non-payment.
• Interest Charge. The interest is charged on the actual amount of your invoices that you advance. This will usually be expressed as a fixed percent above the factors base rate. The base rate fluctuates with the Bank of England rate.

A benefit of outsourcing your sales ledger management functionality is that you are changing a fixed cost to a variable cost. This will provide you better visibility on your expenses associated with your services/product.

The cost of borrowing against your invoices should be cheaper than a traditional overdraft as you are providing security.

Another benefit is that the amount you can advance from a factor should grows with your turnover, and the amount you invoice while the amount you can borrow on an overdraft depends on the amount set by your bank – crucially, an overdraft can be removed with little or no notice whereas a factoring service will continue to be offered if you are still writing invoices.

A company uses factor financing to increase and supplement traditional bank financing. Part of the financing offered by the factor can be granted in the form of promissory notes. The client thus has the opportunity of maintaining an overdraft facility with its bank which is willing, on attractive terms and conditions, to recognise the promissory note as a high quality debtor. In many cases, the banker plays an advisory role by actually directing his client to a factor to enable him to benefit from all the guarantee and management services offered. Thus the banking relationship is maintained, perhaps even strengthened. Functions turn out to be complementary whilst at the same time retaining their specific characteristics.