Invoice factoring is a relatively simple process in which the value of invoices are sold to the factoring service in order to access funds quickly. The following are some of the most asked questions related to the service.
What is the Difference Between Factoring, Financing And Discounting?
Despite there being three terms, the choice is actually between factoring and discounting, with invoice financing being an umbrella term for both methods. Invoice discounting is almost identical to factoring but with a higher degree of control over the running of the company’s finances left to the client.
With factoring, the factor will take control of invoice collection and the general running of this part of the process. This can be of great advantage to some, particularly small businesses with little experience. As the risk is higher for the financier, discounting generally requires a higher minimum annual turnover and is better suited to larger businesses.
How Do I Know if I Am Eligible
Most factors require minimum annual turnover limits, typically between £25,000 and £100,000. Some services are designed to help small businesses and startups, however. These will typically have no set minimum limit.
There are various other dynamics that a factor will judge before offering their services but these vary from case to case. In general a well-established B2B, business to business, venture with at least a handful of clients will be required to access the service.
What Proof Do I Need to Prove Eligibility
Although there is no set in stone practice, a factor will typically need to see that your business is stable, with a varied customer base and with no outstanding debt or tax problems. This does mean the factor will need access to various sensitive information so choosing a reputable service is essential.
How Much Money Can I Expect Upfront?
Once the invoice has been presented to the factor, funds are usually made available within 24 hours. The whole value of the invoice is not provided upfront, however, with between 80 and 90% made accessible as long as there are no issues encountered. The further 10-20% is then released upon payment by your client, minus the fees that are set out in the contract.
Are There Upper Threshold Limits?
No definitive limits exist across the board with invoice factoring, with each being set by the individual provider. Some SME, Small to Medium sized Enterprises, providers set the annual maximum limit as low as £250,000 but others can provide tens of millions of funds over the course of the contract term.
What Fees Can I Expect?
Invoice factoring fees vary wildly and some disreputable firms are known to construct contracts with hidden charges that can be enormously problematic. Costs will certainly include transactions fees, a percentage of the invoice and set up fees. Other charges can be incurred for everything from late payments from your clients to credit checking fees, although there are many firms who provide free credit checks. As with any funding contract, it is vital that you understand these potential charges entirely before signing.
Am I Liable For Unpaid Invoices?
This will depend on the type of factoring you choose or are offered. Non-recourse factoring is the method whereby the factor will take on liability for any bad debts due to customer insolvency. This approach requires a higher degree of security and is generally not available to small businesses or startups. It is also typically more expensive as a result of the risk inherent to the factor.
If a customer refuses to pay an invoice, the liability will remain with you, but this becomes a lot less likely when you have a professional finance company collecting outstanding debts for you. This is why factoring is more preferable to small businesses than discounting.
Can You Use More than One Factor at a Time?
Contracts ensure that you can only use one factor at a time as this provides the financier some degree of security in the process. There are measures in place that mean you can swap providers, which your new service will customarily be happy to assist you with, but switching will mean you pay a sizeable fee.
Do I Need To Secure Anything Against the Factor?
Generally speaking, no security needs to be put up in order to access a factoring service, but non-recourse factoring may require a high degree of security for the provider. As with any funding, securing the loan can lead to disastrous outcomes where people lose their homes or company property if the terms are not met, so the risk should be fully understood before signing a contract. Fortunately, the majority of lenders will do their utmost to avoid this situation so employing a reputable company is highly recommended.