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Invoice Factoring

Invoice factoring is becoming increasingly more popular for business start ups and SME’s as it enables you to increase cash flow, instead of waiting for invoices to be paid. This can be very helpful in the early days when capital may be low.

What is factoring?

In simple terms this is selling your outstanding invoice to another company. It is a debt collection service for your unpaid invoices. In many cases business will factor all of their invoices to maintain their working capital.

When you supply good or services to a customer you raise an invoice and send it to your customer as normal. In addition to this you supply an extra copy to your factoring company. The factoring company will then advance you an agreed percentage, typically between 50 and 85% of the invoice total directly into your bank, usually within 3-5 working days. This is a prepayment until the invoice is paid in full. When the factoring company receives full payment of the invoice they will forward the remaining balance, less there agreed percentage, for providing the service. Typically the percentage charged may range from 0.5% to 4% of turnover.

Important points

There are basically three parties involved. The buyer, the seller, and the factor.

Invoice factoring should not be used as a short term fix. Most factoring arrangements will be agreed over a fixed period of time with cancellation periods of approximately 3 months. It is recommended that you seek legal advice or speak to your accountant before entering into a factoring agreement. Factoring may not be right for your business or particular circumstances.

If using a factoring service you must notify your customers of this fact. This will also avoid confusion when the factor approaches the buyer for payment of your invoice.

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