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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
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      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
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      • USA
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      • New Zealand
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      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
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    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
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      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
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      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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Home Invoice Factoring Factoring

Is Factoring Right for Your Company?

John Goodden by John Goodden
December 20, 2022
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Is Factoring Right for Your Company?
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Download file | Play in new window | Duration: 6:20 | Recorded on December 6, 2022

Whereas a company will have several hire purchase and leasing arrangements, they will usually only use one factoring company. It is therefore important that a company assesses whether factoring is a suitable financing option, and if yes, then they must make sure that the right factoring deal is secured.

The first thing to note is that factoring services should not be used to fund capital expenditure. The general rule is that unless factoring improves a company’s profitability, then it should not be undertaken. Using factoring to manage debt and keep a business afloat is a poor decision, fraught with risk.

It is usual for a company in the process of deciding whether factoring is the best financing option to prepare two projections for the next one to three years – one with factoring and one without.  It has to be determined whether a company can be profitable after absorbing the costs of factoring.

These determinations should not be based on the assumptions that all invoices will be suitable for factoring or that prepayments for invoices should be fully used. Over-reliance on factoring to provide working capital is dangerous as there could be a disputed delivery, damaged goods etc. that reduces the amount of funds available by factoring at any given time.

Ideally a factoring arrangement facilitates higher sales and cheaper prices per unit.

If a company has an even spread of debtors and credit insurance it might not require factoring services. If they have robust credit control systems in place, they might not require a factoring company to take control of their ledger of trade receivables. In such a situation, invoice discounting might be a more suitable option.

Which Factoring Company?

If after serious consideration and analysis a company decides that factoring is the best financing solution, then the next decision to make is which factoring company or bank to use.

The key issue is the credit standing of the factoring company. A company should make enquiries that sufficient funds are in place to deal with delays and insolvent debtors. When an invoice is factored a percentage of the unpaid invoice is prepaid. The remaining balance is only remitted to the seller when the factor collects on the invoice. Essentially, the company has become an unsecured creditor of the factoring company. If the factor becomes insolvent in that time, the balance will be unpaid and address through insurance or legal means will be required.

There are about 60 companies offering factoring services in the UK. They range from small, privately-owned companies that only take on clients with turnovers less than £500,000 a year to banks that can handle multimillion pound trade receivable ledgers.

Despite the numerous available options in the UK, many companies are swayed by their bank to use a factoring facility linked to the bank. There seems to be an unconscious bias prevalent in business to follow the suggestions of their bank for fear of opprobrium. Instead, it is worth getting three offers and investigating charges and terms. These can vary greatly from business to business. Not doing due diligence can be costly in this case. Moreover, a factoring firm will take over the sales ledger of a company, placing itself at the heart of a company. Considering this, it is worth spending the time to get the factoring deal that is most advantageous for a company.

Another thing to bear in mind for a company looking to use a factoring firm is membership of UK Finance. It is a trade organisation formed in 2017. It represents about 300 companies involved in the financial services sector. UK Finance makes its members adhere to a code of conduct as well as running seminars and training programmes to maintain high standards in the industry. A company can make an application to a Professional Standards Council if its member is accused of falling short in its services. This provides a company with some reassurance when deciding to opt for a factoring company.

Considering Costs

There are two main charges made in factoring. The first is an administration charge derived as a percentage of the annual turnover. The other is a finance charge based on a percentage of the funds used. There are, however, other charges to watch out for. Many factoring companies will charge a refactoring charge for late payment by the debtor. Small companies might also be asked to pay an annual administration charge that could be detrimental to the financial health of the small company. A company must be clear what the administration fee covers as there are often other ancillary charges for actions such as filling documents, inspecting books, increasing debt limits etc.

Within an agreement for factoring, there will be clauses laying out the procedures for terminating the arrangement. These should be scrutinised. Designated periods of notice can be up to 12 months. In some instances, a factoring company will require 12 months’ notice during which time no invoices can be financed. Such conditions could be financially disastrous for a company. Alternatively, a factoring company may include a contractual clause which reduces prepayments during the termination process of a factoring arrangement.

Guarantees and Indemnities

If the company seeking factoring facilities is a member of a group of companies, a factoring firm may insist on legal guarantees made by large shareholders and directors that they will reimburse any losses to the factoring firm if a debt cannot be collected because of insolvency. Sometimes there aren’t any limits placed on these guarantees. Such clauses should be entered in to with extreme caution especially by those individuals risking their own money.

Indemnities are sometimes expected against a company collecting a debt directly rather than allowing the factoring firm to channel money through its own accounts. Indemnity is sometimes sought against deliveries of goods or services that don’t match the details of the invoice.

In Summary

A company looking to use the services of a factoring firm has plenty of choice in the UK. Before entering any agreement, a company should do its homework regarding fees, guarantees, indemnities and termination clauses.

Moreover, a company should not be unduly swayed by its bank when choosing a factoring facility. A company should consider the size of a factoring house and whether they have the resources to deal with large debts. It is not impossible for a factoring firm to go insolvent and leave its clients short of pocket.

Perhaps the best place to start when choosing the factoring firm that is right for your company is to approach UK Finance. They can advise about industry standards and identify key components of a factoring arrangement that might have otherwise gone unnoticed.

Tags: ancillary chargescosts of factoringindemnitiestermination clausesUK Finance
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
    • North America
      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
    • Digital Platform/IT/Software Providers
    • UK Fintech
    • Articles
      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
  • Rates
  • Economy
    • Economic Indicators
    • Articles
      • The Collapse of the Russian Rouble: An Historical Analysis and Current Implications
      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance Legal Aspects
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
  • Associations
  • ESG
    • ESG Articles
    • ESG Resources
  • Crypto Finance
    • Ripple (XRP) Wins Latest Battle with SEC
    • UK Passes Financial Services and Markets Act 2023
    • Latest about the UK Regulatory Proposal for Crypto Assets
    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
    • Markets in Crypto Act (MiCA) Becomes EU Law
    • An Introduction to EU’s Markets in Crypto-Assets (MiCA) Law 
    • Supply Chains and Blockchain Technology
    • The DeFi Revolution
    • How DeFi Fulfils the Functions of Finance
    • Taxonomy of Crypto Assets
    • Crypto Currencies
  • Interviews
    • Interview with Tradeshift
    • Interview with Kyriba
    • Interview with Orbian
    • Interview with Crossflow
    • Interview with Dancerace
    • Interview with BlackLine
    • Interview with Novicap Part One
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