Factoring & invoice discounting definitions

Under the terms of his factoring facility the company will submit copies of sales invoices to the factoring company (either by post or electronically) who in return will make available a pre-agreed percentage of the value of the invoices for immediate drawdown.

The factoring company will maintain the sales ledger on behalf of the client and will contact the customer for payment of the invoices if and when they become overdue.

When the customer has paid the debt to the factor, the company will then receive the balance of the invoice, less the factor’s charges.

The main benefit of factoring is in it’s flexibility as unlike more traditional forms of funding, the amount of finance available is tied to sales so the availability of finance is always there to meet rising sales.

The different types of facility

Factoring without recourse

Non-recourse factoring is where the factor assumes the responsibility for bad debt losses (subject to individual credit limits) as well as maintaining the sales ledger and the collection of debts.

Factoring with recourse

The factor carries out the administration of the sales ledger and the collection of debts with the client remaining responsible for bad debt losses

Agency factoring

This is a form of factoring whereby the client, rather than the factor, retains responsibility for the maintenance of the sales ledger, credit control and collection of debts, although the customer is aware of the factoring arrangement and debtor payments are still be made directly to the factor.

This type of facility is therefore generally only suitable for those businesses that already maintain a professional sales ledger and credit operation and where the accounting workload may be too high for the factor to handle economically.

Invoice discounting

Invoice discounting is an undisclosed facility where the company continues to maintain their own sales ledgers and collect in overdue accounts but lodges all receipts in the factoring company's bank account and not their own. This type of facility carries more risk to the factor and is therefore normally only available to larger companies with proven profitability and net worth

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