Debt factoring involves selling your invoices to a third party. In return they will process the invoices and allow you to draw loans against the money owed to your business. Prompt Payer has joined forces with experienced, independent factoring brokers, Simply Business who will offer Prompt Payer members free, no obligation advice.
Debt Factoring is commonly used by companies to improve cash flow but can also be used to reduce administration overheads. Companies that supply this service are called Factors or Debt Factoring companies.
Invoice discounting is an alternative way of drawing money against your invoices. However, your business retains control over the administration of your sales ledger. As well as providing finance, which is probably the main attraction, it offers valuable support services and credit insurance.
Debt Factoring
Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cash flow.
Factoring is offered to companies trading business-to-business on credit terms. It is not normally available to retailers or to cash traders.
Factors can be independent or subsidiaries of major banks and financial institutions. They will want to meet you, visit your business and review your financial situation.
After agreeing to work together and signing the agreement, the factor will typically agree to advance up to 85 per cent of approved invoices. Payment is usually made within 24 hours.
Understanding how it works
- 1. Usually all of your company sales will go through the factor.
- 2. You will then raise an invoice, which has instructions to pay the factor directly, and send it to the customer.
- 3. Send a copy of the invoice to the factor.
- 4. The factor pays an agreed percentage of the invoice to you.
- 5. The factor issues statements to the customer on your behalf.
- 6. The factor operates credit control procedures including telephoning the customer if necessary.
- 7. When a customer pays an invoice, 100% of the invoice should be paid directly to the factor.
- 8. The factor pays the balance of the invoice to you.
- 9. Fees and interest will be deducted from the payment.
- 10. If an invoice is unpaid, responsibility for paying the debt will depend on the type of agreement - either Recourse Factoring or Non-Recourse Factoring.
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 cash flow.
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 and an annual turnover of at least £500,000.
Understanding how it 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.
Features of Invoice Discounting
- You collect the debts and do the credit control.
- Your customers do not usually know about the invoice discounting, although it is sometimes disclosed.
- Annual turnover must usually be at least £500,000, although increasingly smaller businesses will be accepted. Generally, discounters will review the credit history and profit track record of your business.
- You can choose between recourse and non-recourse facilities, determining who is responsible for recouping unpaid invoices.
Quotes
Prompt Payer has joined forces with experienced, independent factoring brokers, Simply Business who will offer Prompt Payer members free, no obligation advice.
For a Factoring quote - click here
For an Invoice Discounting quote - click here