|
|
|
What is Factoring?
Factoring is selling your unpaid sales invoices to a bank or factoring company.
Like a mortgage, if you have, say £100,000 of unpaid sales invoices, a factoring company could advance you up to a maximum percentage of this amount (typically 80%).
So in this example, you could borrow £80,000. But remember, you don't have to borrow all of this, just what you need - this will affect how much factoring costs you.
Usually, your factoring company will collect the money directly from your client so you don't have to worry about credit contol, although, invoice discounting (a close relative of factoring) allows you to keep control of credit control if you wish.
How much does it cost?
Factoring companies make their money by charging you interest on the amount you borrow as well as a service charge which is usually based on your overall turnover.
For example:
If your turnover is £300,000 per annum and the average amount you borrow is £30,000, your annual costs may look something like this:
|
Service charge |
1.5% |
£4500 |
|
Interest charge |
base rate* + 1.75% |
£2100 |
* assumes base rate of 5.25%
Some banks also charge an annual audit fee, typically around £500.
Finally, some banks may include 'debt insurance' in their service charge, which means that if one of your sales invoices remains unpaid, the majority of the loss will be covered by the factoring company.
|
|
