What is factoring

Factoring is a means of increasing working capital or liquidity by “selling” a company’s sales invoices to a factoring company as and when they are raised, in return for an immediate payment of a pre-agreed percentage of the invoice value.

The factoring company will also maintain the sales ledger including credit control so there are administrative savings to be made in addition to the increased liquidity.

In practice the factoring company will advance up to 85% of the invoice value (including vat) as and when the invoices are raised with the balance of 15% being paid over when the customer has repaid the debt to the factor.

Factoring is suitable for most companies that sell a product or provide a service and is more effective for companies who’s major asset are the trade debts due to them as banks are no longer interested in offering overdraft facilities to this type of company, especially if the company is newly established.

Although supposedly straight forward there are alarming differences between the different factoring facilities between one factoring company and another as whilst most claim to offer an efficient and personal service very often the reverse is true with the lack of flexibility strangling the life out of their client and the levels of funding never reaching the agreed levels thanks to a range of excuses used to keep funding as low as possible.

“What is factoring”  is a website from Factoring Solutions and we have offered some guidance about the potential pitfalls including chapters on the poor service offered by some factoring companies, how and why factoring companies keep the funding levels as low as possible and why the quoted rates may not be as straight forward may appear.