Factoring is also known to be called debt factoring, and it basically involves selling your invoices to a third party, or a factoring company. In exchange, they will process the invoices, allowing you to draw funds against the money owed to your business. Essentially, these companies provide a finance, debt collection and ledger management service.
Factoring is commonly used by businesses to improve their cash flow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies.
Further, 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, it offers valuable support services and credit insurance.
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 businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders.
Factoring companies can be subsidiaries of major banks and financial institutions, or independent businesses. Regardless, they will want to talk with you to learn more about your business, review your financial situation and study your business plan. This is how they evaluate your suitability for a factoring facility. Credit limits might be required - if so, you must agree how they will operate.
After signing an agreement, the factoring company will typically agree to a percent of the approved invoices, and typically payment is usually made available within 24 to 48 hours.
Check the notice period to the end of the service because many factors require three months' notice, but some require longer. Negotiate if you are not agree with the notice period.
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