What Is Factoring?

What is factoring?

by Paul Forrest on 23 May, 2012

One of the most difficult challenges to running a business is keeping the cash flowing. Factoring offers a chance to close the gap between finding money to pay suppliers, meeting staff wages etc. and chasing up late paying customers. Cash flow difficulties account for many small businesses failure.

There can be many other reasons why businesses fail, including poor audit management or a lack of planning. Cash flow management, however, can be controlled by the utilising of factoring facilities which will inject valuable funding into the business.

So what is factoring and how does it work? The factoring company will buy from you invoices that you have issued to your customers. You will initially receive a proportion of the value of the invoice within 24 hours of issue; the remainder, minus a small fee, would generally be payable on settlement by the customer.

It has a number of benefits, including the following:

• The ability to secure money quickly
• Being able to smooth your cash flow
• Avoiding the hassle of collecting debt that is overdue
• Having some protection in place against bad debt
• Accessing money against the value of your customers invoices

Some factoring companies will also help you to manage your credit control by providing ancillary services in addition to financing your invoices. These services may include contacting your customers and chasing up slow payers. Most factoring companies will provide detailed statements and a full accounting service.

The internet offers today’s businesses the opportunity to keep up to the minute with their financial dealings. Factoring is no exception; many providers allow you to keep track of your transactions 24 hours a day, seven days a week.

Factoring is by no means a new way of financing; it was known to be acceptable business practice as far back as the 14th Century in England. The Pilgrim Fathers took the custom across the Atlantic where it was adopted, closely related to early merchant banking facilities. During recent years, the development of technology has made factoring a more specialised branch of raising finance.

Interestingly, not all industries use factoring purely for improving cash flow. In the textile industry, for example, factoring has historically been the recognised form of finance, even for companies that have been running on a firm financial foothold.

So it is clear to see that factoring can be a great help in keeping control of a business’s finances. But is it suitable for all companies? Does the size of the company have a bearing on whether factoring would be appropriate? And, how do you go about choosing the best provider for your requirements?

On the face of it, being able to receive a cash advance on invoices might seem like a boon to a small business that is likely to be strapped for cash at regular intervals. Entrepreneurs need to understand, however, that factoring firms are running a business too. They need to ensure that they can be confident of getting their money back.

Typically, factoring suppliers will be looking at customers, whose turnover is in excess of £50,000 per year, although some will have special facilities designed for start-up businesses, including sole traders. How much cash factors make available for invoices will vary between the factoring business and the size and type of company needing their services. Typically, up to 85% of invoice value will be released up front.

So who should you choose as a factoring partner? Major financial institutions offer factoring as part of their package of financial services. There are also specialist factoring providers. The key is to look for a reputable company with a strong track record in servicing businesses just like you.

Key points to look for include how long the financing organisation has been in business. If they have survived the roller coaster ride that is the finance industry during the past two decades, they will be a fairly safe bet. Also, if they have specialists in your local geographical area and your industry, they would probably be someone to consider.

About the Author

Paul Forrest

Paul Forrest is an experienced writer in many fields of interest and we are delighted that he will now be a regular contributor to ukmoneymarket.co.uk in 2012. paul.forrest@articlewriter.biz www.articlewriter.biz