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Invoice Factoring Compnaies

Invoice Factoring Companies

Working With Invoice Factoring Companies

Business can reduce their admin and credit problems by working with an invoice factoring company to improve cash flow.  With invoice factoring a business sells its debts (customer invoices) to the invoice factoring company.  Money is then advanced to your business immediately after the debts are sold (within 48 hours) and additionally the factoring company will take responsibility for managing your sales ledger and following-up to collect overdue invoices.

Two types of invoice factoring available to companies in the UK:

Recourse Factoring

Non-Recourse Factoring

With recourse factoring your business is responsible for any customers that default on payment.  If a customer fails to pay their invoice after a certain number of agreed days then the factoring company is entitled to a repayment on monies previously advanced.

If you have a non-recourse agreement, then the customer debt is the responsibility of the factoring company and they take full responsibility for credit collection and any costs associated with it, such as legal action etc.

Another product within the invoice finance portfolio and offered by some factoring companies is something called invoice discounting. Invoice discounting is similar to factoring in so far as it provides cash based on invoices submitted however with invoice discounting your business keeps responsibility for the invoicing process and credit collection etc.

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Invoice Factoring Companies - Where Do You Start?

Within the United Kingdom, the vast majority of invoice factoring companies are members of ABFA (Asset Based Finance Association).  While many of the factoring companies are divisions of well-known banks there are also many independent companies that specialise in factoring or invoice finance.  When you're considering factoring you might want to talk to your bank to see what they have to offer but you don't have to use your bank.

Within the factoring industry some factoring companies are industry specialists - they won't want customers outside this specialism.  Other factoring companies such as the banks are generally happy to offer factoring to a wide range of business sectors.

When you're considering factoring companies there are some key questions to ask:

  • How much does the factoring service cost? What are the charge
  • If you're not happy or wish to leave - what's the notice period?
  • What are the terms and conditions for taking a factoring agreement?  (Make sure you read these and/or get legal advice)

Invoice Factoring Companies - What are the Charges?

Generally there are two main charges, used by invoice factoring companies:

  • Discount Charges
  • Credit Management Charges

Discount charges vary but are usually between one and three per cent above base rate.  Similar to an interest charge on other sources of finance such as a loan or overdraft, discount charges tend to be calculated daily and then invoiced monthly.

Credit management charges are, the agreed fees, charged for credit and sales ledger management and usually is less than three per cent of your turnover.

If you have a non-recourse factoring arrangement then the charges will be based on the risks.  Also in a non-recourse agreement there will be a charge for credit protection.

Invoice Factoring - Getting Started With A Company

Once you've decided that invoice factoring provides an satisfactory solution for your business requirements you should the apply to some invoice factoring companies.  A small number is usually appropriate as you will need one who you can work with in partnership.  After you apply the company will send out a factoring expert to meet with you and to establish whether your business is suitable for invoice finance. The factoring company should spend time to understand what your business does, what products and services you offer as well as the invoicing processes.  They will need all the details of poor paying customers, bad debt etc.  The whole process of agreeing, negotiating and engaging a factoring company can take a couple of months so be aware.

You could start getting quotes from factoring companies now.

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