Factoring and Invoice Discounting
Factoring allows you to raise finance based on the value of monies outstanding from your customers. It also allows you to outsource your debt collection function and to use more sophisticated credit rating systems.
Benefits
Factoring enables you to raise up to 80 per cent or more on your outstanding invoices. An overdraft secured against invoices would typically raise 50 per cent.
The credit line effectively grows with your growing sales, unlike other sources of finance which have to be renegotiated.
Factoring can significantly reduce the amount of time spent on managing debts and chasing money. (The Factor will usually manage your outstanding debts on your behalf.)
It is possible to purchase non-recourse factoring, which will protect you against bad debts.
Disadvantages
Customers may perceive that you are in financial difficulty if you use a factor. (Although this risk is diminishing as factoring becomes more widespread.)
You may lose some control. Factors will effectively take over your sales ledger and may wish to pre-approve your customers.
It can be difficult to end a factoring arrangement. Your only exit route is to repurchase your sales ledger or to switch factors.