Factoring or Debt Factoring typically used by business to help cash flow. Factoring involves a business selling it’s sales invoices to a Factoring company, at a discount. The business is then able to “draw down” cash against the sales invoices and the Factor (as Factoring companies are known) collects the money from the business’s customers, acting as their sales ledger and credit control team.
A Factor will typically allow a client to withdraw or “draw down” an advance of about 85% of their approved sales invoices.
The factoring fee is taken by the Factors when the sales invoice is received. There is also a monthly discount fee (that works a bit like overdraft interest) charged on the balance of funds that have been drawn.
There are two sorts of Factoring:
Non-Recourse Factoring and Recourse Factoring.
Recourse Factoring or Recourse Agreements mean that the Factor does not take on the risk of the bad debts. So, if the customer does not pay their invoice, the Factor can reclaim the money. This means that after a certain number of days (specified in the Factoring company), the debt is “disapproved” and the money must be repaid to the Factor.
With Non-Recourse Factoring or Non-Recourse Agreements, the Factor takes on the bad debt risk (although, beware – Factors do not accept genuine disputes, in this instance).
(Incidentally, Invoice Discounting – is similar to Factoring, but the company will not maintain a sales ledger or do credit control)
A good idea.Factoring takes off the pressure of running the wire to recover debts.