2. The Factoring & Invoice Financing process…
Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to improve cashflow by effectively selling your unpaid invoices to a factoring company.
When an invoice is raised
- you raise an invoice, which has instructions to pay the factor directly and send it to the customer. Send a copy of the invoice to the factor
- the factor makes an agreed percentage of the invoice available for you to draw on
- the factor issues statements to the customer on your behalf. It operates credit control procedures including telephoning the customer if necessary. You will agree how to contact the customer with the factor beforehand
When an invoice is paid by the customer
- the customer should pay 100% of the invoice directly to the factor
- the factor pays the balance of the invoice to you
When an invoice is not paid
If an invoice is not paid, responsibility for paying the debt will depend on the type of agreement – either recourse factoring or non-recourse factoring. In recourse factoring you are liable for the debt, and in non-recourse factoring the factor takes on any bad debts.
The factor will take a fee when they receive the invoice. They will also charge a ‘discount charge’ which works like interest and is calculated against the balance of funds drawn on a monthly basis.
Invoice discounting is an alternative way of drawing money against your invoices that allows you to retain control over your sales ledger.
You will pay a fee to the invoice discounter, usually a percentage of the value of the invoices or an agreed fixed fee and discount (interest) on the net amount advanced. They will be notified of the invoice details electronically – through downloads of sales day books or invoice listings.
Once they receive notification, the invoice discounter will make funds available at the agreed percentage rate, which you can then use. As you receive cash from debtors you pay it to the invoice discounter, reducing the outstanding balance and making the remaining amount available.