Debt factoring is when a business sells its accounts receivables to a third party. That third party pays the business a percentage of the total amount originally charged to the client and usually takes full responsibility for collecting the payment from the buyer. This transaction allows businesses to get quick access to cash before the clients pay for the goods or services received, allowing them to re-invest that money right away.
The factoring company also takes care of chasing collection of the owed payment on behalf of the client – when the payment is made, the remaining value not initially forwarded is given to the business minus prearranged fees for their service provided.
The more that you’ll discover that this increasingly popular cash flow solution encompasses a wide range of products – each tailor-made to suit different businesses in different economic situations
Debt or invoice factoring is ideal for businesses that need help to manage their sales ledger. Alternatively, some firms who’ve spent years developing their in-house credit collection systems prefer to retain control of their sales ledger, meaning that they’ll often lean towards an invoice discounting facility or factoring financiers who allow clients to handle their own credit control (CHOCS).
Requirements for debt factoring
If you are wishing to use a debt factoring facility, you will need to consider whether you fulfill the following qualification criteria:
- Debt factoring financiers look for their clients to show that they’ve consistently achieved an annual turnover of £50,000 or more for several years beforehand.
- Most debt factoring funders will only strike up arrangements with those businesses operating in the UK, rather than firms based abroad with UK branches/commercial activities.
- You’ll also need to ensure that the credit terms offered to your customers when raising invoices span from 30 to 90 days.
Usually, immediately after the debt factoring company buys the invoice, it pays the business a major percentage of the original amount due by the client. Then, when the debt factoring company collects the full payment from the client, it releases the remaining percentage of the original amount due by the client, minus a factoring fee.
Debt factoring advantages
The main advantage of debt factoring is that it gives businesses quick access to cash even before their clients pay for the goods or services they have already received. It increases their cash flow and allows them to re-invest that money or simply use it at their convenience.
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Another advantage to debt factoring services, is that it can be provided by both traditional financial institutions and debt factoring, invoice factoring, or invoice brokers. While the process through traditional financial institutions (such as banks and insurance companies) tends to be quite lengthy and complicated, working with invoice factoring companies is much easier as most of them don’t require collateral assets.
Debt factoring disadvantages
The factoring fees are definitely the largest disadvantage in debt factoring. While the percentages charged by the factoring companies vary greatly depending on several factors, selling invoices costs money. You can use Velotrade’s invoice factoring calculator to get an idea of the factoring fees depending on the invoice value and the days financed. Actual amounts depend, among other things, on the creditworthiness of the debtor and the length of the commercial relationship.
Debt factoring with Velotrade
Velotrade is the web-based debt factoring solution to provide you with immediate cash flow by selling your outstanding invoices. We provide companies around the world accessible and reasonable ways to financing.
We are regulated by the Securities and Futures Commission of Hong Kong, which maintains and promotes the fairness, efficiency, competitiveness, transparency, and orderliness of the securities and futures industry in Hong Kong.
Velotrade offers all of the advantages and removes the disadvantages when compared to traditional factoring companies. For one, Velotrade’s clients are not locked into a long contract. Second, Velotrade offers flexibility that allows clients to fund only the invoices they want. Third, fees are transparent and straightforward.
Debt factoring, in much the same vein as some other cash flow support facilities, isn’t necessarily suited to every UK business. For example, if your firm’s sales ledger relies on a small number of core customers of which are less reliant on 30-90 day credit terms, then your chances of securing a debt factoring arrangement are slimmer.
Additionally, the size of your current customer base can affect the funding available through debt factoring due to concentration limits imposed by certain arrangements, meaning that businesses with smaller client rosters may want to consider alternative facilities which don’t rely on this criterion such as an unsecured business loan.