FAQs

FAQs

• 1. What is factoring?

   

  Factoring is essentially selling your invoices to a third party. In return, the factor will process the invoices and allow you to draw loans against the money owed to your business.

   

  It is also used to outsource debt collection and ledger management therefore reducing administration overheads and improving cashflow.

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• 2. How does factoring work?

   

  A deal is agreed between the two parties (the company and the factoring organisation) which contains details including the percentage that will be paid by the factoring organisation on receipt of an invoice and the percentage that will be paid when the factoring organisation receives full payment from the company that has been invoiced.

   

  When an invoice is raised, it is stamped with instructions to pay the factor directly, it is then sent to the customer and a copy is sent to the factor. This is where the company heavily benefits, receiving a large percentage of an invoice immediately that they may have had to wait weeks or months to receive.

   

  The factor pays an agreed percentage of the invoice to the company.

   

  The factor issues statements to the customer on the companies behalf. It operates credit control procedures which may include telephoning the customer.

   

  The customer should pay 100 % of the invoice directly to the factor.

   

  The factor pays the balance of the invoice to the company. Fees and interest will be deducted from the end payment.

   

  If an invoice is not paid, responsibility for paying the debt will depend on the type of agreement you have entered - either recourse factoring or non-recourse factoring.

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• 3. Why use factoring?

   

  Cash flow is widely recognised as the life blood of any business, being crucial to short and long term success. Factoring is a method used to keep cash coming into the business, this keeps the bank balance looking healthy, limits bad debt and gives the company the maximum chance to operate and expand to its full potential.

   

  - Factoring is a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business.

  - It can assist cashflow and financial planning.

  - Factors collect debts on a daily basis and so you are buying into their debt collection skills and processes.

  - Useful information about the credit standing of your customers is usually available therefore allowing you to make informed decisions on who and on what basis you deal with your customers.

  - If you choose non-recourse factoring you will be protected from bad debts.

  - Cash is released as soon as orders are invoiced which means that cash is available to take advantage of suppliers terms and discounts.

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• 4. What is Recourse factoring?

   

  A recourse factoring facility does not offer protection against bad debts. Therefore the factor will be able to reclaim their money from you if the customer does not pay.

   

  The factoring agreement will specify how many days after the due date for payment you must refund the advance. The factor will, as part of their collection activity, chase the outstanding payment until the due date for repayment.

   

  If the debt remains unpaid the factor will 'recourse' the debt back to the company, it will then be up to them to take measures necessary to recoup the outstanding debt. Any advances the company have received against this invoice are repaid to the factor at this stage.

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• 5. What is Non-recourse factoring?

   

  Non-recourse factoring means that the factor is taking on the bad debt risk.

   

  There are a number of nuances to this facility but it does not insure against slow payment.

   

  The factor takes over all your rights to pursue the customer for payment. This includes the right to take legal action.

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• 6. How much will a facility cost?

   

  Charges are the subject of a formal quotation after the provider gains an understanding of a business and the workload to be undertaken. The charges are made up of:

   

  - The service fee, which is commonly between 0.75% and 2.5% of turnover depending on the type of facility you require; and

   

  - The discount charge which is calculated on day-to-day usage of funds drawn down. It is likely to be comparable with normal secured bank overdraft rates.

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• 7. How do I choose a factor?

   

  There are a variety of factors to choose from, some are subsidiaries of major banks and financial institutions, others are independent.

   

  A company needs to be able to make an informed choice, and a factoring broker such as BTG Commercial Finance will be able to find several alternatives and negotiate on your behalf. We offer a free initial assessment of your needs and introduce you to a factor who meets your requirements. We do not charge as the factor will pay a fee if you become a client following our introduction.

   

  BTG Commercial Finance only works with recognised factoring organisations who are members of the trade body ABFA. http://www.abfa.org.uk

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• 8. Why use BTG Commercial Finance?

   

  - Unlike many brokers our team have all worked within the factoring sector and therefore can offer independent and knowledgeable advice.

   

  - BTG Commercial Finance has no affiliation to any factor and therefore by utilising our services we save you time and identify which factors are suitable for your business.

   

  - We always provide an alternative to ensure you have a choice and always base our recommendations on your requirements.

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