Debt Factoring is another term for invoice factoring (also known as invoice finance), wherein a business passes on unpaid invoices for work completed or products sold to a debt factoring company. That factoring company will subsequently pay your business upfront for the invoices and assume responsibility for collecting the debt.
In most cases, you'll receive as much as 90% of the value of the invoice, with the remaining balance (less the factoring fee) paid when the outstanding invoice is paid to the factoring company.
Essentially, debt factoring allows your business to release funds from unpaid invoices, making a notable difference to your cash flow.
For example, if a business that makes sales of £10,000 per month has payment terms of 60 days, they could be owed £20,000 in receivables at any one time. This business could sell the majority of unpaid invoices (e.g. 90%) to a factoring company, giving them almost immediate access to £18,000 through debt factoring.
The debt factoring company will subsequently attempt to collect the invoice payment from the customers, sending the remaining value of the invoice to the business, less a fee. In this example, if the factoring company charged 3%, the business would receive a further £1,400 meaning that they only paid £600 to the factoring provider.
Put simply, debt factoring can be exceptionally beneficial for businesses struggling with cash flow or liquidity. Through a relatively small fee, your business gains access to funds already owed to them. As an added benefit, your business doesn't have to spend time chasing unpaid invoices.
A major benefit of debt factoring is that it can help to improve your business's cash flow. Instead of waiting for your customers to pay, you can get your hands on capital as soon as the invoice is raised. By using debt factoring, you can pay your employees, suppliers and other parties earlier, giving your business financial space to grow.
Debt factoring can be viewed as a viable way of improving your financial outlook. By using debt factoring against outstanding invoices, you’ll receive money from the debt factoring company immediately, so you won’t have to wait for your customers to pay. However, there are some disadvantages to debt factoring, which we've summarised below alongside the advantages.
Your business gets quick access to cash when you need it. Typically, money will arrive in your business account between 24 and 48 hours after submitting your invoices.
You can improve your business cash flow, as you no longer need to wait for your customers to pay. This allows you to put funds back into the business almost immediately.
You can protect your business against bad debts if you opt for non-recourse factoring. This means that if your customer becomes insolvent during the factoring period, your business doesn’t have to shoulder the cost.
Your business can benefit from a simpler collections process. Because the debt factoring company takes responsibility for collecting invoices as they fall due, you can focus on growing your business.
You can protect your business against debts from unpaid invoices. Because debt factoring gives you access to owed funds, you don't have to wait for payment from slow-paying customers.
Your business could pay a higher interest rate compared to financing sourced from a bank or building society.
Your business may risk straining your customer relationships. This is a more likely risk in cases where your customer relationship is already strained. However, you can avoid further straining your customer relationship by choosing a reputable debt factoring company.
Your business could be liable for bad debt. Although some debt factoring companies provide debt protection, they may pass responsibility for unpaid sums back to your business.
Your business could pay higher fees if you have slow-paying customers. This is because the factoring company has to spend more time and effort.
Your business won't receive the full invoice amount. Because the debt factoring company takes a relatively small fee for their services, your business won't receive the full amount of the unpaid invoice.
To be eligible for debt factoring and other forms of invoice financing, your business will need to meet the following criteria:
If your company meets these criteria, you may be eligible for debt factoring. To find out more, simply click the link below to quickly and easily compare current offers.