Factoring
Factoring or Debtor Financing is another flexible form of lending, where funds are advanced against moneys (debtors) owed to you by your clients.
It is a highly flexible and increasingly popular way to raise finance, sometimes without the need to provide bricks and mortar security.
If you compare Factoring /Debtor Financing to a traditional overdraft facility, the overdraft facility is limited to the amount of security available.
Factoring on the other hand, can increase along with your company. As a business grows, your expenses generally increase right along with the turnover. At the same time, you will be attracting new clients. All too often, companies will experience significant cash-flow shortages as they grow.
Because you are attracting new customers, your business has to maintain its control and ensure that moneys owed to you are collected within a reasonable time frame to cover your ongoing fixed expenses including manufacturing costs and wages for your staff.
Debtor Finance
By using Debtor Finance, you may be able to access funds up to 80% of your invoice value (outstanding debtor payments) within a shorter timeframe. Whilst there are fees involved, you may consider this to be no greater than offering your client a discount for early payment of their invoice.
Therefore instead of waiting to receive payment for a job or work completed in another 60 to 90 days, you have ready access to the funds to continue running and covering the ongoing costs of your business.
Additionally, as you now have access to funding a lot quicker, you can approach your suppliers for a discount as you may now be in a position to pay them on an almost "cash on delivery" arrangement.
We have access to different forms of Debtor Financing.
Debtor Discounting
This is an undisclosed arrangement between you (the supplier), and a financier, where you may be advanced up to 80% of the value of one or more of your invoices by the financier prior to receiving the payment from your customer.
You continue to collect your debtors (ie: moneys owed to you), and once payment is received from the customer for these financed invoices you then bank these funds into a specific debtor discounting account. The financier then draws on this account and pays you the remaining balance of the invoice, less their fee.
Within this product, you're given a choice of either discounting all or just some of your debtors. This allows you to maintain your usual relationship with the prompt payers, while you obtain discount finance against the customers that do not pay you straight away.
Your clients are not aware of your arrangements simply because nobody advises them.
In business, we all deal with customers and some are stronger or more financial than others. Furthermore, you can keep the facility for six months or 16 years, letting it stay dormant (unused) for lengthy periods. This way, if your company goes through expansion or tougher trading times, you'll have money available as you need it.
As there is considerably more work involved in this facility for the financier, the costs are higher, than what they would normally be for the Debtor Discounting option.
However, you do have to weigh up the higher costs of Factoring, especially considering you will have cost saving by not needing to employ someone within your business to do the following up.
Factoring
This alternative works much the same as Debtor Discounting.
The main difference, however, is that once you have sold your invoice and received up to 80% of the value of one or more of your invoices by the financier, the financier will collect the debt. This means that your factoring arrangement becomes known.
A considerable advantage by utilizing this arrangement is that you will no longer have one of your employees dedicated to chasing the payment of outstanding money from your debtors.
Organisations that may Benefit from Invoice Discounting
- Ad Agencies
- Business Consultants
- Computer Suppliers
- Consulting Companies
- Couriers
- Distributors
- Engineers
- Logistic Services
- Manufacturers
- Medical Supplies
- Plant Hire
- Printers
- Publishers
- Recruitment Agencies
- Real Estate Agencies
- Stationers
- Transport Companies
- Wholesalers and many more
