Invoice Factoring Services Buying Guide
How it works
Factoring works as follows: The factor fully manages your
sales ledger and provides you with credit control and collection
services of all your outstanding debts. The invoices you
issue upon a sale are sent to the factor who typically advances
up to 80 to 90% of the invoice amount to you. The balance,
less charges, is paid when the customer makes payment directly
to the factor. The service is disclosed to your customer
who typically receives a letter from the factor, or attached
note to your invoice, containing payment instructions to
the factor. Funds are typically released to you within 24
hours of issuing the invoice.
There are typically two costs involved: a service charge
expressed as a percentage of sales factored and an interest
charge for the cash advances. The service charge, covering
sales ledger management, collections services and, if you
wish, bad debt protection can range between 0.60% and 3.0%
of turnover. The main considerations in determining the
service charge are your annual turnover, number of invoices
and number of customers. The interest charges calculated
on the daily usage of funds is typically comparable to normal
secured bank overdraft rates.
When the risk of bad debts remains with you the service
is referred to as recourse factoring. Non-recourse factoring
protects you against customers who fail to pay. The factor
typically covers this risk by taking out credit insurance.
The cost of the credit insurance is passed on to you and
depends on the risk profile of your customers and the amount
you factor, typically between 0.3% and 0.7% of turnover.
You also agree on coverage limits with the factor, normally
80-95% of the factored amount.
Many factoring companies provide Internet access to your
account, allowing you to constantly monitor your sales ledger
and individual customer details. Paper can be eliminated
by electronic transfer of your invoices from your PC to
the factor.
