Basically, factoring is a service whereby the factor will turn up to 85% of the value of each sales invoice into cash within 24 hours. The factor will then work alongside the business to collect in any outstanding payments of those invoices from customers. The remaining 15%, less a small service fee, is paid to the business once payment has been received.
The benefits to a business is that it not only receives an immediate cash injection into the business but it also gains access to an on-going source of funds that is linked directly to current sales.
It can improve profitability as the business can pay suppliers early, buy in larger quantities and take advantage of any volume discounts that are available. Businesses using a factoring facility can also save costs on postage, stationery, telephone calls and most importantly it allows the managers to spend their time more productively developing business instead of chasing payment.
Flexible funding, however, is not the only advantage that factoring can offer. The professional credit control function provided by the factor can be equally valuable. With many businesses, the owner inevitably gets involved in the credit control issues, distracting him from more important tasks like running the business. By working with a factor, it means that, as well as a significant reduction in payment days and improvement in cash flow, valuable management time can be spent more productively driving the business forward.
Factoring is particularly popular amongst manufacturers ? 36% of UK firms taking advantage of this type of funding are in this sector ? as they tend to have to fund a lot of upfront material to manufacture a product before getting paid. Service firms account for 28% and distribution firms 22%.
