Factoring – Buying guide

Cash flow is the life blood of any business, whether large or small. Suppliers and employees must be paid and resources must be found to invest in growth and expansion. But generating sufficient cash flow to satisfy these requirements can be difficult, especially for startups and small businesses that offer credit terms to customers and thus face a lag between billing and payment.

What is factoring?

Businesses that offer credit terms to customers can turn unpaid invoices into instant cash by invoice factoring companies. In exchange for a small fee, a factoring broker or company will advance an average of 80% of the value of an outstanding customer invoice to a business and pay the remainder once the customer has paid the bill. This is a common practice for small and medium-sized companies to generate cash flow without resorting to bank loans.

Who needs factoring?

• Start-ups and small companies in need of cash flow solutions to get off the ground.
• Businesses with credit problems or insufficient collateral.
• Companies going through a period of rapid growth.
• Service-based industries that rely on invoicing.
• Small businesses with no dedicated credit control.
• Any businesses that offers credit to its customers.

What are the benefits of factoring?

Factoring makes money available that would otherwise be tied up in invoices. That cash is a business asset, representing a secure method of short-term borrowing without incurring debt. Factoring also alleviates the hassle of chasing unpaid invoices and the risk of bad debt against the business. With flexible contract arrangements and account management taken care of by the factor, it is a smart way to free up cash and fuel the growth of your company.

Who are the UK’s main factoring companies?

• RBS
• Lloyds TSB
• Barclays
• GE Commercial Finance
• Touch Financial
• HSBC
• SME
• Bibby Financial Services

What costs does invoice factoring include?

• Start-up fees.
• Transaction/administration fees.
• Discount fees including interest rates and commission as a percentage.
• Termination fees.
• Credit insurance service fees.

What other types of invoice finance are available?

With invoice factoring, the factor who buys your invoices also chases the debts and manages your credit control (you can choose between recourse and non-recourse options). The other main process is invoice discounting (usually for larger businesses) which is where the third party issue money for invoices, but you remain in control of your sales ledger and communicate with customers directly. These can be in domestic or international factoring agreements.