Factoring and invoice discounting
There's a lot of information on the internet about factoring and invoice discounting so we thought it would be helpful to give you some facts.
- In a factoring arrangement, the responsibility for chasing your unpaid invoices lies with the factoring company and not you.
- In an invoice discounting arrangement, you are responsible for chasing your debtors and getting the money in.
- Invoice discounting is generally cheaper than factoring - because you're taking on more of the workload.
- You may be able to be selective about which customers you include in your factoring or invoice discounting arrangement - so you may decide to only factor part of your debtor book.
- When you start with a funder, you can normally include invoices that are already up to 90 days old.
- All deals are not the same - from week to week there can be a significant difference in the rates that are on offer by funders. You must make sure you get an independent check done before you sign any deal. Our Compare My Deal service is ideal for this.
- Funding deals normally take 5-10 days to put into place.
- Both factoring and invoice discounting are commonplace in the UK and there is no stigma attached to either solution.
Here's an example of the cost differences between factoring and invoice discounting
Example costs for a small company that is new to factoring
Let's assume that you are a smallish company with a turnover of about £500k. You are a manufacturer and you generally have good quality customers (they pay their bills – and mostly on time!)
You would typically expect to get an 80% advance on the gross (inclusive of vat) value of your invoices and a funding limit of £75k. The funder would probably charge you a service charge of 1-1.25% of the value of the invoice and you would also be charged 3% over bank base rate of any funds in use (the money you draw down against your invoices).
Example costs for a larger company that is new to invoice discounting
If you are a larger company looking to advance against your invoices (let's say you have a turnover of £2m and are an engineering business) and you have good in-house credit control, you’ll probably find that funders will offer you an invoice discounting arrangement rather than a factoring deal.
You could be offered a deal based on a service charge of say 0.45% of invoice value plus a 80% advance on the gross invoice value and a charge for funds in use of 2.5% over base. You could expect a funding limit of about £250k.
The deal you may be offered however, can vary greatly depending on factors such as collectability of your debt, customer credit ratings etc. We will help guide you to the best deal for you.
For larger businesses, we may be able to visit you to discuss your future objectives and funding requirements.
