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Ask The Experts > Factoring

Factoring is a type of debtor finance available to businesses to improve their working capital position. It enables businesses that sell goods/services to other businesses on credit terms to borrow against the value of the outstanding invoices.

If a business is using Factoring, that business will sell their invoices to a Factor (lender) and assign the rights to those invoices to the Factor. The Factor will advance normally up to 80% of the face value of those invoices to the business normally within 24 hours (can be same day). When the customer pays the invoice, the Factor will remit the remaining 20% of the face value of the invoice, less any interest or associated costs.

The difference between Factoring and Invoice Discounting is that under Factoring, the customer is aware of the Factor as an assignment clause is denoted on the face of the invoice. Whereas, under Invoice Discounting, the customer is not aware of the Factor. Factoring is therefore "disclosed" to the customer.

A factoring facility is more suitable to the following type of businesses:

  • Start up situations
  • Businesses with tax arrears or trading losses
  • Businesses with manual accounting systems
  • Businesses who sell on heavily contractual terms
  • Where one or two customers take up a high percentage of the business's outstanding balance

A major benefit of Factoring would be that if the business and the Factor agree, the business can outsource the credit control function, saving the business time and money.

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