Small and medium sized enterprises need a constant flow of cash. Whether looking to establish themselves on the market, grow their operation or even expanding into new territories, capital is required. Unfortunately this isn’t always readily available to small businesses, even those who have a full order book.
Traditional sources of lending such as bank loans and small business overdrafts are becoming increasingly difficult to obtain. This has resulted in the development of flexible funding solutions such as factoring. Here we answer the all important factoring questions.
So, what is factoring?
Factoring is an asset based funding solution. Once an agreement is in place with the factor, as each invoice is issued by the SME, an agreed percentage will be released providing a much needed cash injection to the business. Once the client pays in full the remainder will be released, minus a service fee taken by the funder.
How quickly will the cash be released?
It all depends on the agreement with the individual funder, but usually this will be within 24 hours.
How much is provided initially?
Again this depends on the individual factor, but in most instances will be around 85 – 90%, giving much needed cashflow.
Who chases the payment?
Under a factoring agreement, the factor will take control of the sales ledger. This involves chasing the clients for payment, freeing up the SME much needed time to concentrate on all other elements of their business.
Are the customers aware of the agreement?
Under a standard factoring contract the invoiced clients will be aware of the agreement as the factor will be chasing them for payment. However, confidential factoring does exist, whereby the factor will contact clients under the name of the original business. The service which is provided will depend on the individual agreement.
Does this service exist for all invoices issued?
The SME can choose which invoices are covered by the factoring agreement.
Which businesses qualify for factoring?
Legally registered businesses providing goods or services on terms to other credit-worthy and reputable businesses will qualify for factoring.
Does the service involve credit-checks on customers?
Before a factoring agreement is in place, credit checks will be run on existing and prospective clients however, at Aldermore it’s not only based on what the computer says but an individual person will look at each and every application.
What happens if a customer doesn’t pay?
It is envisaged this will be negated by the credit checks runs by the factor. However, clients who have not paid their invoices is something every business must deal with at some stage. In most instances the factor will have dedicated credit recovery services as part of the agreement, taking the strain off the shoulders of the SME.
What are the benefits of factoring?
Benefits of factoring include:
- Access up to 90% of the value of invoices
- The ability to view your sales ledger
- More funding available than through traditional overdrafts
- Less admin – credit checks, statements and collections operated by the factor
- Debt recovery services should they be needed