What you should Know about Factoring and How it can Work for You

The world of business has changed over the past decades, and this includes the way you collect from your customers and clients. Many more convenient ways of collection – and therefore cashflow injections – make it possible to grow your business faster and with more ease. One of those ways is by employing a factoring or invoice discounting service. But what exactly is a service such as factoring, and how can it benefit your business? Here’s everything you should know about factoring and how it can work for you.

Factoring explained

You have a customer or client, you’ve done a service for them or have already delivered your product, and you have an agreement that the client has one month to pay upon receipt of the invoice. In other words, you’ve billed them and they have 30 days to pay. But the problem is that you may need that payment sooner – you may not be able to wait that long if you want to improve your cashflow. A factoring service will pay you a portion of that money upfront, immediately, and will then take on responsibility for the collection of the debt. Typically, factoring services offer you up to 85% or more of the value of the invoice, paid up front.

Factoring explained

Where does factoring start?

Factoring starts as soon as the invoice is issued and ready to be sent off to your customer or client – as soon as the invoice is issued, a legal claim of debt is created. Of course, you should have made an arrangement with a factoring service first; the terms will be highly dependent on who your customers are and the amounts of the invoices.

What does a factoring service do?

They buy the invoice from you. They relieve you of your hassle of collecting. They pay you up front. They take care of your customers and allow you to go about your business with an increased cashflow.

What are the charges?

Typically, charges include:

  • Discount rate (a certain % of the invoice, based on a certain rate per month).
  • Management fee.
  • Other charges – it’s possible there are other charges, such as credit protection, depending on your contract with the factoring service.

When you choose to retain a factoring service (like the service available from experienced financing providers ultimatefinance.co.uk), you are, in effect, selling your invoices to the factoring service at a discounted rate. And this can greatly improve your cashflow and allow your business to invest funds in new projects or gain working capital quickly. As there are many factoring services out there, it’s important for you to approach various ones and compare both the quality of service and existing rates and fees. However, rates are usually very competitive, and great deals can surely be found.

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