Invoice factoring & discounting
Invoice factoring means that you can release funds more quickly, through getting an advance based on the value of your outstanding invoices. You can also save the time and cost of administering your sales ledger, because factoring companies in the UK can do this for you. In recent years, invoice factoring has enjoyed a remarkable rise in popularity, with both large and small companies taking advantage of the opportunity to get discounted cash flow. It is now often combined with asset-based lending (on vehicles, property or IT for example). Invoice discounting is a similar process, with the difference that your customers are not aware of it happening. This guide takes you through the main stages of factoring and invoice discounting, to help you decide whether it is suitable for you and, if so, what options you can choose.
How invoice factoring works in the UK
Factoring companies will set various criteria if they are going to work with you:
• Factoring companies will audit your books and accounts, to ensure that your sales ledger fits the size and type of businesses that they deal with. Typically, factoring companies in the UK will only deal with businesses with an annual turnover in excess of £200,000, although there is room for negotiation.
• Factoring companies will check that you are not over-reliant on one customer - no more than around 40 per cent of your turnover.
• When considering invoice factoring your company should offer standard credit terms for your industry and show that you are able to collect your debts within a reasonable time. Some kinds of business, such as construction firms, which collect money in stages and are liable to disagreements, may not qualify for invoice factoring in the UK.
• You will probably have to route all your sales invoices through the factoring company.
The tasty bit about factoring
As soon as you send off an invoice for a sale, you also send a copy to the factoring company. They will pay you an agreed proportion (typically 70-85 per cent and up to 95% in the UK) of the invoice almost immediately, generally on the same day as they receive the invoice.
The factoring company then collects the invoice on your behalf, sending statements to the customer and contacting late payers by phone or email. Once the factoring company has received the full payment, you get the balance owed to you, minus the factoring fee.
Recourse or non-recourse factoring?
The difference between these two types of invoice factoring is the risk of bad debt. With recourse factoring, if the customer fails to pay their bills, you are liable to recompense the factor. With non-recourse factoring, the factoring companies have to bear the cost of the bad debt. Of course, non-recourse factoring is more expensive to buy than recourse factoring. Less companies today are offering non-recourse factoring although it is still available through large banks such as HSBC in the UK.