Factoring (and invoice discounting, another form of invoice finance) offers most businesses an added advantage in raising funds or general cash flow assistance by providing cash against unpaid invoices. Due to the innovative way that borrowed money is secured, factoring frequently allows businesses to borrow larger amounts of money compared to more traditional forms of commercial finance such as bank overdrafts.

Factoring normally works as follows:

Step 1	You perform the service or provide goods as agreed with your client and notify the factoring company of the invoice value.
Step 2	The factoring company pay into your bank account an agreed percentage of the value of the invoice.
Step 3	The factoring company collect the payment from your client.
Step 4	The factoring company pay you the balance of the invoice value having deducted any fees.

What is the difference between Factoring and Invoice Discounting?

Both services normally provide finance against debtor balances outstanding. Factoring provides the additional advantage of a full sales ledger and collections service under which the Factor takes on the responsibility for your sales ledger. Under an Invoice Discounting service, by contrast, you continue to administer the sales ledger and the service is usually undisclosed to customers.

What is the difference between Recourse and Non Recourse Factoring?

Recourse Factoring excludes bad debt protection. The risk remains with you and if the customer fails to pay, the factor will seek repayment of the amount financed against that debt. If bad debt protection is included, the service is called Non Recourse Factoring. This means that if a credit-approved customer fails to pay an undisputed debt, the Factor will credit you with the amount of the debt.

How much can a factoring or invoice discounting company lend?

The amount that an invoice financier will lend your business will be entirely dependent on the total value of invoices outstanding. As a guide, invoice financiers will advance around 80% of approved debts.
 

How easy is it to end the relationship with a Factor or Invoice Discounter?

Termination will be subject to the terms of the contract, which should be read carefully before signing. Some contracts stipulate three months notice, exercisable at any time or on a contract anniversary, while some are annual. Termination is always subject to full repayment of funds provided by the Factor or Invoice Discounter, and you must ensure that the required finance is available when needed.

What are "Approved Debts"?

These are debts which a Factor or Invoice Discounter is willing to finance. In a non recourse contract this can mean that they are within customers’ credit limits. In a recourse contract it means that they are within the financing limits applied generally or on specific customer accounts. Disputed debts are normally unapproved, as are recourse debts that are considered stale, usually meaning more than 90 days old.

Have you another question?

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