Factoring and Invoice Discounting

Introduction Restructuring and Reorganising Overdrafts Mortgages, Secured Directors Loans Small Firms Loan Factoring and Invoice Discounting Trade and Stock Finance Asset Finance Venture Capital Business Angels

What is factoring and how does it work?

A factor buys the invoices that you raise and will immediately remit to you usually by direct bank transfer an agreed percentage of the value, usually between 75% and 85%.

As part of the factoring agreement the factor administers your sales ledger issuing statements and generally performing the debt collection process you would normally employ a credit controller to undertake.

When your customer pays the factor, the balance of the invoice is remitted to you.

How much does it cost?

There are two charges levied, the service charge and the discount charge. The service charge is usually between 2% and 3% and is based on what the factor considers it will cost to administer your sales ledger. The service charge therefore depends upon the size of the business, the number of customers and the number invoices raised. In addition to this service it is often possible to obtain credit insurance to cover you in the event that your customer goes out of business and the premium is reflected as an increase in the service charge.

The discount charge ranges between 1.5% and 3% over Bank of England base rate and relates to a charge on your borrowings. Due to competition within the market place discount charges are so competitive that they now offer a realistic alternative to the more recognised forms of lending such as bank overdraft and loans.

How does invoice discounting differ from factoring?

Invoice discounting comes in two forms known as disclosed invoice discounting and confidential invoice discounting. Both operate on a similar basis to factoring, applying both service and discount charges. The service charges however are usually lower than that applied in factoring agreements as the customer retains the credit control facility in house, receipts from customers being paid into a designated account for the finance provider.

Confidential Invoice Discounting is often an attractive alternative for many businesses due to the fact that the relationship is retained directly with its customers who are not aware of the invoice discounting arrangement. Historically due to the lack of control available to the factoring company it has generally been the reserve of profitable and more secure businesses.

Discount charges usually range between 0.5% and 2% over Bank of England base rate.

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