What is factoring?

Factoring is a flexible form of finance, which advances money to a company as and when it issues new invoices. Factoring can bridge the gap between raising an invoice and getting that invoice paid. Factoring provides the cash flow necessary for working capital and growth.

Advantages of invoice factoring

There are two major advantages of invoice factoring over overdrafts or other forms of personal or business loans. These are:

  • Factoring is flexible in that the amount you can borrow grows directly with your sales. This is essential to enable companies to fund their growth, since you must usually pay your suppliers before you receive payments from your customers.
  • No other assets are needed to secure this funding.

How does factoring work?

When you send out your invoice, you also send the factor a copy of the gross invoice amount.

They will then advance funds of up to 95% of your outstanding sales invoices – normally within 24 hours. Some degree of credit management (credit control) can also be built into the facility.

Factoring is different to invoice discounting as a factor will build and manage a sales ledger.

The best way to explain this is if a client submitted 100 invoices representing a week’s work for ten debtors, the factor would need to set up each debtor account and input each invoice to the correct account. A credit control service is then provided and the cash is collected. The cash is then allocated to the correct debtor account.

Using the same scenario, but with an invoice discounting facility, the same 100 invoices would still be submitted but the batch of invoices would be input onto a single control account. When debtors pay, the cash is bulked together and posted to the ledger as one day’s collections.

  • Retain your own collections
  • Credit control service
  • Confidential factoring
  • Construction factoring
  • Recruitment factoring (inclusive of payroll)
How factoring is charged

Confidential Factoring

What is the difference between factoring and confidential factoring?

From a cash flow perspective Factoring and Confidential Factoring are identical. Invoices are sent or uploaded to the provider and availability is generated for the client to draw as and when they require funds. From a service perspective the Factor will chase your customers anonymously in one of two ways.

1. The factoring provider will assume your corporate identity.

  • You are allocated a credit controller and a designated telephone number that when called is answered in your company name.
  • All calls, letters and statements are branded with your company identity and logo.
  • A notice of assignment is not required to be displayed on your invoices.
  • The Factors bank account is also set up in your company name to received customer payments.

2. The factoring provider will outsource credit control to a third party (a separate limited company set up, or partnered with the Factoring company).

  • Your customers are chased by XYZ Ltd (the third party) on behalf of your company name.
  • All calls, letters and statement are produced on XYZ Ltd headed paper but referenced in your company name.
  • A notice of assignment is not required to be displayed on your invoices.
  • The Factors bank account is set up in your company name and customer payments are collected by XYZ Ltd into the Factors bank account.

What does it cost?

Factoring providers charge two main fees: a service fee and a discounting fee. These combined are 90% of the costs involved.

Thereafter, a facility is also subject to smaller (and sometimes optional) one-off charges, or “disbursements”.

Invoice finance charges are levied as follows:

Service fee: an agreed percentage of the invoice factored, eg factored invoice is £1,000, service fee is 2%, factors charge = £20.

Discounting fee: interest of money borrowed, eg an invoice for £1,000 is factored generating the client £750 which is available to be drawn down at the client’s request. If this sum was drawn down in full and was outstanding (borrowed) for 45 days before the customer paid, a client would be charged interest on £750 for 45 days (the fee would equate to an estimated £6). Interest is charged normally at 2% to 3% over base.
Please note, base rates can vary from provider to provider and are subject to capping at an agreed minimum level.

Disbursements: these are extra fees such as chaps payments, normally £15 to £30 if funds are requested same day. These charges are often free if funds are drawn via a three-day payment. With refactoring fees, between 0.5% and 1.25% of the invoice value is levied monthly against old invoices which take longer than four months to pay, bounced cheques and credit searches. Disbursements are the industry’s hidden income and something our services will help explain and keep to a minimum.

In summing up, a £1,000 invoice is financed at 75% at 2% service rate and 2.5% over the agreed base rate (discounting rate). If the £750 is drawn for 45 days, the client should expect to be charged:

£20 service fee (1,000 at 2%)
Circa £6 interest for the 45 days.
Total charge = £26.00 per £1,000 + some small optional disbursements.