Many small business fail each year because of late payers – the cash that they are owed arrives too late. One way to help with the cashflow is to use factoring. Factoring is essentially where you sell the debt you are owed to a third party who will then pay you a portion of the debt owed in advance. They will then chase the debt and recoup the money themselves.

Obviously, it would be great if everyone paid on time. Help yourself by ensuring that your payment terms are clearly stated in your contracts, and also on your invoices. It’s not a nice job, but make sure you have credit control procedures in place and you follow them each month. Sometimes, this just isn’t enough or you simply don’t have the time. Factoring can help – it can boost your cashflow and help you cut down on the time spend on credit control. Customers also tend to pay more readily to a factor. However, factoring comes at a cost and can reduce the amount of money that you can borrow from a bank. Some factors will also want a say in how you conduct the financials in your business.

How factoring works

When you produce invoices for the customer, you also print an invoice and send it to the factoring company. From that point onwards, the factor takes over the responsibility for chasing the payment and they will pay you 80% of the debt up front. Once the factor recives payment, the balance of the invoice is available to the supplier.

Factors allow a business to have access to cash immediately, rather than waiting months for the money. It also leaves the company more time to chase sales. Factoring can often be cheaper than other sources of finance, such as an overdraft.

Of course, the factoring company will charge fees. Firstly, they take a discounting fee which is applied to the cash transferred from the factoring company before the invoice is paid. Secondly, a fee will be charged depending on the level of service they are providing, and the number of customer accounts and invoices that they handle. Factoring services normally work out at about 0.75% to 3% of your company’s turnover.

The terms and conditions will vary, so it pays to shop around before choosing your factor. The factor will most likely want to check your books and accounts to make sure that you meet their criteria. They may ask you to change the way you handle your accounts. Credit limits will then be agreed and contracts exchanged.

Typically, a factor will pay around 80% of the invoice in the first instance, and will normally make payments within 24 hours.

Is my company suitable for using factoring?

Factoring isn’t for all companies. Businesses who sell direct to the public (such as shops) are not suitable. You should also have an annual turnover of £250,000 or more with a large client base.

Click here to see a list of Factoring companies.

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