Article – Factoring 101
What is Factoring
Factoring is where a company submits copies of sales invoices to the factoring company who in return makes available a pre-agreed percentage (up to 85%) of the value of the invoices for immediate drawdown.
The factoring company maintains the sales ledger on behalf of the client and will contact the customer for payment of the invoices if and when they become overdue. When the customer has paid the debt to the factor, the client is then entitled to the balance of the invoice, less the factor’s charges.
The main benefit of factoring is in it’s flexibility as unlike more traditional forms of funding, the amount of finance available is tied to sales so the finance is always there to meet rising sales.
Most types of company whether selling goods or supplying a service are eligible for factoring as long as their customers are not private individuals and as long as the goods have been delivered or the services already performed as they won’t fund invoices in advance of this happening.
There are two charges involved. First the Factoring Commission which is usually in the range of 0.5% to 3% of sales and that covers the cost of maintaining the ledger and the facility itself. The second is the Discount Charge – normally between 2% and 3% above base rate and is charged on the funds advanced prior to repayment of the invoice by the customer.
In the past the major factors started to show interest in companies with annual sales in excess of £250,000 and a good spread of customers and would turn their noses up at certain industries like subcontractors to the building industry but due to the competitive nature of the industry things have changed recently and now competitively priced facilities are available for companies who’s annual sales are as little as £100,000, who only have one customer and even those companies involved in the building industry.
On the surface the factors all seem to offer a similar product but there are variations in the way that many of them operate and this is where the factoring broker comes in as we know the marketplace and can place each company with the most appropriate factor for their individual needs. As all brokers receive a “finder’s fee” directly from the factor there is no charge to the company for the broker’s services.
Article written by Ian Johnston of Factoring Solutions and appeared in Today’s London