Updated: 2nd February 2016
Debt factoring is a type of business finance facility based on the value of your sales ledger. A pre-agreed percentage of each debt owed to you is advanced by the factoring company, with 80% to 90% being the usual proportion.
Attaining debtor finance is based on various requirements, the main one being that you have business credit customers paying on 30 to 90-day terms. Eligibility also depends on your turnover, how efficiently you collect your debts, and the credit-worthiness of your customer base.
If your business is eligible for factoring, you send out your invoices as normal, with a copy of each invoice going to the factor. The money is usually advanced within 24 hours, so you have almost immediate access to cash lump sums whenever you complete and invoice work.
The lender is responsible for collecting customer payments, and when this is done they send you the balance minus their own fees and charges. Your customers will be aware that you’ve raised finance based on their debt, as they pay the lender directly.
Factoring ‘with recourse’ keeps you liable for customer debts if they fail to pay, and will reduce your costs. This may be preferable if you have confidence in your customer base, and that non-payment will be the exception rather than the rule.
The alternative – ‘non-recourse’ – means that you won’t have to repay anything to the lender if they aren’t successful in collecting payment, but this type of factoring attracts higher fees.
General criteria for eligibility include:
Other criteria could include your level of profitability, the overall value of your sales ledger, the number of debtors and length of time you have been trading. Each lender has their own specific criteria, which is why it’s important to approach a range of different factoring companies.
Various sources for factoring your debts include dedicated departments within banks and other financial institutions, as well as companies set up to offer this specific type of business lending.
The industry has grown considerably in recent years, to the benefit of businesses seeking working capital on a regular basis. The fact that the choice of lender has widened introduces healthy competition on fees, levels of service, and flexibility within an agreement.
You may choose to approach your bank for debtor financing especially if you have enjoyed a good working relationship in the past, but don’t forget the smaller independent providers. They may be able to offer better terms, a more agile service, and a shorter notice period on exit.
It is good advice to approach a broker or finance professional before searching for the best deal. Debt factoring terms can be complex, and industries vary in their needs in this respect.
You’ll have a better understanding of what’s good for your company, and avoid potential mistakes.
Debtor financing is popular with businesses in a range of industries. The fast access to working capital enables business owners and directors to think about growth – a subject that may have previously been off the agenda.
It’s not only the cash input that benefits these businesses, however. Factoring your debts can change the way you do business on a day-to-day basis – with more time to focus on your income-generating activities rather than chasing payment just to stay afloat, you can plan strategically and with confidence.
The first step in deciding whether debt factoring would suit your business is to seek expert guidance. Once you know what to negotiate for, and what to avoid within the terms and conditions of a factoring agreement, you’ll stand the best chance of maximising your opportunities.
If you’re wondering whether debt factoring is the right choice for your business, get in touch with Real Business Rescue. We understand the invoice finance market, have connections with numerous factoring companies in the UK, and can offer the professional advice that you need.