Debt factoring is when a business sells their outstanding invoices to a debt factoring company. The debt factoring company will pay up to the full amount outstanding on the invoice and chase the outstanding debt for you, and in turn charge you a percentage of the invoice for doing so. Although this can be a quick way of getting cash into your business it has its advantages and disadvantages.
Debt factoring is also known as Invoice Factoring, Invoice Financing or Invoice Discounting.
It increases your cash flow as you’re not having to wait for the payment to come in. This is especially good if you have lots of clients who are late payers. Keeping your cashflow healthy is important in business but you also have to consider the long term effects.
Saves time and resources
Using a debt factoring company means that you don’t have to invest the time into chasing the outstanding debt yourself, or employing someone to do the chasing.
Costs the business money
Not only are you risking getting less money for the outstanding amount on the invoice but you will also have to pay the debt factoring company a percentage of the invoice. In the long term debt factoring is not a good solution if you want to grow your profits.
Loss of confidentiality
Your client will be aware that you are using a debt factoring company to chase invoices. They may be unhappy with the fact that you're involving a third party as this means someone else is aware of their financial difficulty. Also this may affect your reputation as your clients will think you are in financial trouble for needing cash instantly.
Requirements for Debt Factoring
Not every business can use the services of a debt factoring company. In order to use their services you usually have to meet the following criteria;
Your business is achieving an annual turnover of at least £50,000
You must be UK based
Your credit terms on your invoices range from 30-90 days
It’s important to consider all options before instructing a Debt Factoring agency. Debt Factoring may be good for your business in the short term, but you must think about the long term effects too.
Before making a decision please speak to your bookkeeper or accountant. They may be able to point you in the right direction and offer you advice and support in order to avoid having to do this.