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What is Factoring?
Factoring is a type of funding solution, sometimes known as Debtor Finance, that allows businesses that issue invoices to sell them to a lender to advance the payment, rather than waiting out lengthy payment terms. This goes alongside Confidential Invoice Discounting (CID), Client Handles Own Credit Control Services (CHOCCs), and Spot Factoring facilities under the Invoice Finance umbrella. Waiting your payment terms for all of your issued invoices can lead to cashflow issues, and a factoring facility can remove this stress on your finances. A factoring partner can advance you up to 100% of your invoices value, and the remaining balance minus any fees will be paid to you once your customer fulfils their payment. The amount of credit accessible through this facility will depend heavily on your industry, with some having access to higher prepayment percentages.
The costs involved with a Factoring facility, are as follows:
- The Service Fee covers the cost of the administration for the service the lending partner gives you. This involves the running of your facility, the collecting, and the processing of your payments.
- The Discount Fee is equivalent to the typical interest fee you would be given on a loan. This covers the cost for the facility itself, and is typically between 1-5%.
- The Arrangement Fee covers the cost of tailoring and building your facility. This varies from lender to lender, and will depend on a few factors, such as the size of your facility, and the nature of the product.
