How Factoring works?

If you are selling goods or services to businesses, on credit terms, then a factoring facility could solve your cash flow problems.

1. You despatch goods to your customers
2. Raise invoices and send to your customers, also forwarding copies to the factoring company
3. Receive up to 85% of the invoice values immediately
4. Factoring company will chase the debts by telephone and letter, and will send monthly statements to every customer
5. Receive the balance of the invoice values (less charges) when the customer pays

Some factoring companies also offer credit protection against bad debts (for which an additional charge will be levied).

There are two main charges levied by factoring companies for operating a factoring facility. These are the Service Charge and the Discount Rate.

The Service Charge is expressed as a percentage of turnover, and reflects the workload for the Factor in terms of processing invoices and credit notes and chasing the ledger.

The Service Charge generally ranges between 0.5% and 3% of turnover. Credit protection, where available, will usually add a further 0.5% onto the cost.

The Discount Charge is the charge for the amount of funds drawn from the facility. Calculated on a daily basis, but charged monthly, the rate typically varies between 2% and 3% over bank base rate.

Additional charges include refactoring charges, charges for telegraphic transfers and documentation fees. It is important to understand all the charges at the outset so that you will not be surprised by any hidden fees.