Factoring for UK businesses

How Factoring works

1 The client sends his customers invoices for completed work.

2 The client sends a batch of copy invoices to the factor.

3 The factor pays up to 90% of the invoice values to the client.

4 The factor runs the sales ledger - telephone/statements.

5 The factor collects payment from the customers.

6 The factor pays the balance, 10%, less charges, to the client.

Obviously in most cases there will be an existing sales ledger in place at the time when a factoring agreement commences. In this case the factor can make available funding of up to 90% of the qualifying book debts, which in many cases can provide a healthy cash injection, even when existing bank overdrafts have to be repaid.

There are two main charges in a factoring agreement :-

• Service Fee - This is a percentage charge on the clients actual turnover ; usually 0.5% to 3.5% of invoice value.
  
  
• Cost of Money - This is an interest charge on the funds advanced by the factor ; usually 1.5% to 3.5% over bank base rate. This charge is usually quite competitive when compared to bank overdraft rates.

Criteria Guidelines

The items below are not exhaustive and it is obviously always the factor who will make the final decision on what is suitable for them or not :-

• Suitable for Sole Traders, Partnerships & Limited Companies.
  
  
• Turnover range £40k up to £20m
  
  
• New Start businesses are a growing sector
  
  
• No minimum accounting criteria, both loss making and negative net worth businesses will be considered.
  
  
• Ideally 5 to 6 live customers on the ledger preferred, but there are factors who will consider single debtor ledgers.
  
  
• Funding levels usually vary from 50% to 85% of invoice value, but in some cases up to 90% can be available.
  
  
• Trade credit sales only can be factored not debts to the public.
  
  
• Factoring can be provided with debt insurance.
  
  
• Both UK and export debts can be funded.
  
  
• Phoenix situations and CVAs can be considered.
  
  
• The range of factorable industries continues to increase so please call us for up to date information on whether your own is suitable.

Other considerations

More than many forms of finance it is important to understand the full detail of the quotation rather than just the headline rates.

Some of the areas that can affect the actual amount of funding you receive include; credit limits, concentration or high involvement policies, timing of age disapproval and contra trading.

Some of the areas that can affect the overall cost of the facility include; refactoring charges, minimum annual fees, charges per invoice and money transmission costs.

In addition to the above there are general issues, which include; length of contract, length of notice to terminate and level of security required.

It is in helping to explain these areas and outlining the different options available to you, that we feel we can provide most added value.