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Factoring and Invoice Discounting

Factoring is a flexible form of loan, which advances money to a company as it issues new invoices.

This is different to overdrafts or more formal loans, which are usually for a fixed amount.

When you enter into a contract with a factoring company, the factor agrees to control of your invoices, in return for a small fee.

When the factor assumes control of an invoice, they will advance you a percentage of its total value – usually between 70 and 90% of the invoice. They will then take responsibility for ensuring the invoice gets paid; once the money’s in, they’ll pay you the balance due, less their fees and charges.

Factors’ requirements vary from company to company. Some will consider start-ups but typically the company must be operating on a business to business basis and have a turnover of £50,000 or higher.

It is possible to factor key customers and draw down money on individual invoices.

Invoice Discounting is a variation on factoring where the lender still advances money on a business’ invoice but, instead of the lender collecting the debts for the business, the business collects its own debts.

Invoice Discounting facilities are normally made available to established businesses with turnovers in excess of £250,000 which have good systems in place to ensure reliable collections from their customers.

The pros of Factoring and Invoice Discounting are:

Access to an ongoing supply of cash that grows as your sales grow

Benefit from improved profitability as you can pay suppliers earlier, buy in larger quantities and take advantage of any volume discounts available

The cons of Factoring and Invoice Discounting are:

  • Credit limits will be set for customers which may affect the way you trade
  • Exiting the agreement can be difficult
  • Disputed invoices must be dealt with quickly to avoid them being re-coursed
  • In the case of factoring, you are reliant on the factor to collect the debt in a timely and efficient manne