The ABCs of Factoring: Your Essential Guide

As a business, one of your major objectives is obviously to have a smoothly running cashflow. With the right amount of available cash, you can be prepared for any expenses (expected or unexpected) and you will also be able to pay your bills (and your staff) on time.

But if you are having difficulties managing your business’ cashflow, there is one type of service that you can certainly benefit from: factoring.

What to expect with a factoring service 

Factoring works by allowing you to receive an advance on your sales invoices. This service can be provided by a bank subsidiary or other financial institution. What you can expect with this type of service is that the institution will visit and meet with you and make a review of your financial background and situation. They will also most likely assess your plan for your business in order to know how suitable you are for the factoring service. You may also be asked by the factoring service to provide a credit limit for your clients so your invoices will have a limit as well. If this is required, then you also have to make a strict agreement on how this will be done.

Once an agreement is signed

abc of factoringWhen you have made an agreement with the factoring service, they will usually give you an instantaneous advance on your invoices which have been approved. The amount is normally around 85% of your invoices. The balance on this cash advance will then be settled when your clients settle their debts.

What to expect when raising an invoice when availing of a factoring service

Once you have received the advance in cash from the factoring service, you will then raise your invoices for your clients, which will have instructions on how to directly pay the factoring service. Once you have sent the invoices to your clients, you should send a duplicate of the invoice to the factoring service.

The factoring service will then provide you with a previously-agreed-upon percentage of your invoice which you can draw upon when needed. In addition to this, the factoring service will provide your clients with statements on your behalf, and it will normally employ other credit management and control processes and procedures such as contacting your clients if necessary. However, there are also other types of factoring services where your customers need not be aware of the factoring service’s involvement, and this is referred to as confidential factoring.

When the client settles the invoice or when the invoice isn’t paid 

Your client will be asked to pay the full amount of their invoice to the factoring service directly. The factoring service will then pay you the balance of the invoice. However, if your client does not pay the invoice, how you settle the debt will depend on your agreement. For instance, if you opt for recourse factoring, then you are responsible for the debt, but if you opt for non-recourse factoring, then the factoring service will be the one settling the bad debt.

With the right type of financial service such as factoring, you can confidently have cash for any emergency or expense. Additionally, you can take advantage of specific financial services such as construction finance (also provided by cashflow experts like www.ultimatefinance.co.uk for those who are in the construction, maintenance, and building sectors) where you can receive a cash advance once you raise a payment application rather than waiting for your application to be certified. This frees up your available capital for other expenses, contributes to a better cashflow, and allows you to expand your business as well.

Image courtesy of KROMKRATHOG/ FreeDigitalPhotos.net

Mitch Finlay

Web Development Manager

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