What is Factoring?

In simple terms it is the selling of your company’s accounts receivables (debtors) to a third party (NBF), in order to obtain funding. The funding is provided at a discount and is immediate. The amount advanced is a percentage of the approved receivable and will vary. As a general rule the advance is not lower that 80% of the receivable.

What makes a business suitable for factoring?

  • It is best if there are more than just a few customers.
  • No single customer accounts for more than about a third of turnover.
  • Customers accept the standard payment terms for the industry.
  • Customers accept a reasonable period of credit.

What makes a business unsuitable for factoring?

  • The business sells to the public. Factoring is only available for sales to commercial customers
  • Too many small invoices.
  • Too many disputes and queries.
  • The business is not sound, reputable and trustworthy.
  • Customers make part payments or stage payments.

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Recourse factoring and non-recourse factoring

In recourse factoring, the factor does not risk bad debts. Put another way, the factor will be able to reclaim their money from you if the customer does not pay. The factoring agreement will specify how many days after the due date for payment you must refund the advance.

Recourse factoring is cheaper than non-recourse factoring, and may have fewer requirements concerning your customers and your systems. This is because you are taking the bad debt risk.

Non-recourse factoring

In non-recourse factoring, the factor takes on the bad debt risk. It accepts specified risks such as total disappearance, but it does not insure against slow payment. Because of this, non-recourse factoring tends to be more expensive than recourse factoring.

You never have to refund the advance to the factor, but you must pay interest to the factor for the period specified by the factoring agreement.

The factor takes over all your rights to pursue the customer for payment. This includes the right to take legal action.

Invoice discounting

Invoice discounting is an alternative way of drawing money against your invoices. However, your business retains control over the administration of your sales ledger. It provides a cost-effective way for profitable businesses to improve their cashflow.

Invoice discounting is only available to businesses that sell products or services on credit to other businesses. It is normally only available to businesses with a proven track record. It may not necessarily be the cheapest form of finance and can tie you into a long contract.

How invoice discounting works

The invoice discounter will first check the business, its systems and its customers. It may then agree to advance a certain percentage of the total outstanding sales ledger.

You will pay a monthly fee to the invoice discounter and also pay interest on the net amount advanced. This is in addition to advances received or money repaid.

Each month, more money is advanced by the discounter or repaid by you. This will depend on whether the total amount owing has gone up or down.

For example, if the invoice discounter agrees to advance 80 per cent of the total owing and the total of outstanding invoices is steadily changing, then so will the amount you receive. If the outstanding debt drops month on month, you must repay 80 per cent of the fall in debt. If the debt rises month on month, you will receive 80 per cent of the increase.