Those of you who are not familiar with factoring companies might well ask the question, what service can they possibly provide that your bank cannot? This is a valid question, which we will briefly discuss below.
To gain approval for a bank loan or line of credit, you will in, the first instance, need collateral. If your business owns its own premises or other high value assets, this may not be a problem. If yours is a new business, perhaps operating out of rented premises, it will most likely not qualify for a bank loan.
Even if a loan is approved, there will be a waiting period involved. Your application must go through the official channels, which may take weeks, a period of time you might not have if your company is having serious cash flow problems.
Invoice factoring companies, on the other hand, do not ask for collateral, except a reliable debtors ledger. They will need to be convinced that your debtors are all business customers, rather than private individuals and also that they normally pay their debts on time. The invoice factoring company might want to visit your premises to inspect your systems and study your debtors’ payment patterns. Your company will also need a certain minimum annual turnover in order to qualify; usually this is around £50,000.
Once your application has been approved, the money can be in your bank account within a day or two. The advance will normally be between 70% and 85% of your total debtors ledger, the balance, less costs, will be paid out once your debtors have settled their accounts.
The factoring company takes over the collection of your debts. If you prefer not to take this route, invoice discounting, where you remain responsible for debt collection, might be a better option.