Factoring is where a business sells its invoices to another party (the factor) at a discount in exchange for immediate funds. For example, a business may sell its invoices to a factor that pays 80% of the face value to the company. The factor is responsible for the collection of money from customers. The ability to manage bad debts may be transferred to the factor as part of the arrangement.
For example, a company may have outstanding invoices with a value of £250,000. At a discount rate of 95%, £237,500 may be immediately released to the company increasing working capital. The remaining 5% is paid once the customer fully pays their invoice.
The financing company will charge the company a service charge (often based on sales turnover) and discount charge (a percentage over bank base rate).
sending...