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Your company in a debt factoring arrangement

So what exactly can you expect from the factoring company you trade with? The process of debt factoring is a relatively simple one, but it can be hard to separate facts and determine benefits from all the financial terminology and baffling array of figures laid out. Looking through this factoring calculator should help you understand the process, costs and service levels you can expect.

debt factoring

Example of a company’s invoice factoring deal

Business X is a relatively new recruitment company. Because the majority of their income comes from invoices raised against other companies for their staffing services, all payments are delayed whilst waiting for invoices to be sent and paid. And not all payments come back within the 30 days prescribed in the invoice. In the meantime, business X has its own bills to pay, primarily staff wages. They can’t wait for the invoices to come back before payment has to be made. So they have decided to turn to a factoring company to find cash flow solutions and speed up invoice payments.

  • Invoices worth £10,000 are sold to a factoring company.
  • 85% (£8,500) is paid within 24 hours into business X’s account.
  • The factor chases the customer for the full amount which is paid directly to them (£10,000)
  • The remaining amount is paid back to business X, minus the factoring company’s fees. The fees are worked out as a percentage of annual turnover and will include an interest rate and commission rate along with any separate administration fees. Most company’s can only enter into an agreement if they have a turnover of more than £50,000.

What additional benefits does the company receive?

Consider all of the benefits that debt factoring provide, especially the hidden savings:

  • Bookkeeping and sales ledger accounting fully taken care of. This will save employee time (crucial in the early stages of a business where human resources are limited) which can be put to more profitable use (selling, marketing, brand awareness etc), so certain admin costs which they would otherwise be responsible for can be deducted. This is how a factoring deal can really support company growth and in the long term this is the most valuable benefit.
  • Collection of invoices made by a dedicated, professional team. As this company has no established provision for chasing debt or collecting money yet, invoices will be repaid faster with an expert team on the case.
  • Because the company has the cash on hand to pay incoming bills, it can qualify for prompt payment discounts from its own suppliers, saving money and establishing good business links for the future.
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