How It Works
Factoring can be quite an unknown subject,
and many companies simply don’t quite understand
how it works. Below is a quick insight into the world
of factoring.
The factor fully manages your sales ledger and provides
you with credit control and collection services of all
your outstanding debts. The invoices you issue upon
a sale are sent to the factor who typically advances
up to 80 to 90% of the invoice amount to you. The balance,
minus any incurred charges, is paid when the customer
makes payment directly to the factor. The service is
disclosed to your customer who typically receives a
letter from the factor, or attached note to your invoice,
containing payment instructions to the factor.
Funds are typically released to you within 24 hours
of issuing the invoice.
As mentioned above, there are costs involved, this
is how the factor makes a living. There are typically
two costs involved with factoring: a service
charge expressed as a percentage of sales factored
and an interest charge for the cash
advances. The service charge, covering sales ledger
management, collections services and, if you wish, bad
debt protection can range between 0.60% and 3.0% of
turnover. The main considerations in determining the
service charge are your annual turnover, number of invoices
and number of customers. The interest charges calculated
on the daily usage of funds is typically comparable
to normal secured bank overdraft rates.
When the risk of bad debts remains with you the service
is referred to as recourse factoring. Non-recourse factoring
protects you against customers who fail to pay. The
factor typically covers this risk by taking out credit
insurance. The cost of the credit insurance is passed
on to you and depends on the risk profile of your customers
and the amount you factor, typically between 0.3% and
0.7% of turnover. You also agree on coverage limits
with the factor, normally 80-95% of the factored amount.
The majority of the factoring companies now provide
access to your account via the Internet, which means
instant access to your account and allows you to constantly
monitor your sales ledge and any individual customer
details. Paper can be eliminated by electronic transfer
of your invoices from your PC to the factor.
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Invoice
Factoring Guide
