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Small and medium companies, even more than large corporations, need to generate quick cash flow to meet their liabilities and fuel growth - but their customers rarely pay on time. Rather than resorting to traditional bank loans, these companies can look into an alternative solution: debt factoring. This practice has become very common and covers a wide range of financial products to fit the needs of every company, now provided by a wealth of institutions. Interested companies should carefully weigh their choices, all the more so as regulations controlling these financial products are constantly evolving.

The concept and scope of factoring and receivables finance

Strictly speaking, factoring is just one specific kind of what’s generally called receivables finance. If the basic concept is easily understood, the its many different applications require further detailing to fully understand which product best fit one company’s unique needs.

Receivables finance, basically encompasses a series of financial products aimed at ensuring that all invoices issued by companies get paid (almost) immediately, and (almost) in full, with the help of a factor. Technically, the factor will either advance the funds, collect them or insure the payment, or even non-payment of the invoices, on a regular or one-shot basis, thereby releasing immediate access to working capital. Even if these solutions have their drawbacks, they have common advantages that traditional loans don’t enjoy: more flexible, minimal paperwork required, fast approval.

Receivables finance therefore comes in many forms to better fit every company’s needs, each product having its own advantages and disadvantages: factoring in the strict sense, invoice discounting, spot factoring, recourse factoring, non-recourse factoring. 

Crossing the Rubicon: what requirements, which providers?

Once a company representative has identified which solution matches its needs, he or she has to find the right financier, and get the application material ready. On top of the pure players, most commercial banks provide receivables finance, but not all will cover the full scope of receivables finance.

Companies should be aware that some paperwork is needed, especially with regards to bookkeeping. The more detailed the application material will be, the more elements the factor will have to trust the client, and allow cheaper rates. These rates will depend on the chosen scheme, and will usually, though not always include: factoring costs, transaction fees, credit insurance fees, termination costs.

A changing regulatory landscape

As factor/client disputes may arise, debtor finance agreements are quite heavily regulated, on three levels:  industry best practices, UK regulations, EU regulations.

Before bringing the case to a court of law, the ABFA, the industry’s main watchdog organization, which as laid out a series of very precise rules to evaluate any dispute, may help settle a delicate situation.

Applicable UK regulations are therefore defined by many regulators such as the ABFA, and their detailed code of conduct, and the Financial Conduct Authority, an independent regulator and dispute resolution body. HM’s Treasury and the Bank of England, on a macro level, also influence how credit risk is evaluated and priced by factors. 

Finally, the European Union has designed several regulations, which companies interested in cross-border factoring deals will be eager to look into.