What is Factoring and Invoice
Discounting?
Factoring and invoice discounting (known as debtor finance)
can dramatically improve your cash flow by releasing money as
soon as you have completed an order and raised an invoice
rather than having to wait for your customer to pay. This makes
them ideal for funding growth. Because its linked to sales,
factoring or invoice discounting is ideal if your business does
not have the financial track record or security available to
negotiate sufficient overdraft facilities.
A key advantage is flexibility. The amount you can borrow
grows in line with sales and it is often possible for you to
repay bank facilities and release previously pledged
security.
Typically, when factoring is set up you can borrow about 80%
of the value of your approved invoices less than 90-120 days
old. Thereafter, cash will be made available against invoices
on a daily basis with the remaining 20%, less charges, once the
value of the invoice has been collected. Once the system is
established, the level of advance you receive against invoices
depends on a number of issues, but can rise as high as
100%.
Once in place, there is no limit to the amount you can
borrow as the finance is linked directly to sales. This is in
sharp contrast to bank overdrafts, which require regular
re-negotiation and arrangement fees.
The cost of such a facility is normally up to 3% over base
rate for the money borrowed together with a service charge
linked to gross turnover of at least 0.5% depending upon the
level of annual sales, the number invoices raised and how many
live accounts are on the sales ledger. Small addition charges
are often made for extra services such as credit insurance.
John Courtney AIMC, MABS, MInstDis, is the managing
director of Strategy Consulting Limited (http://www.strategyconsultinglimited.co.uk).
Having trained at The Academy of Business Strategy, and is
an associate of the Institute of Management Consultancy and
a member of the Institute of Directors, he is also a
visiting lecturer on the MBA course at Cranfield University
School of Management and a Judge in The National Business
Awards
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