Understanding debt factoring
Understand how debt factoring works and whether it's the right finance solution for your business.
What is debt factoring?
Debt factoring is when a business sells its accounts receivables to a third party at a discount, enabling companies to immediately unlock cash tied up in unpaid invoices without having to wait the usual payment terms.
Debt factoring is also another term used for invoice factoring.
Other types of factoring
Spot factoring is a way for a business to access funds by selling unpaid invoices to a 3rd party, a spot factoring company, on a one off basis in order to receive payment quicker.
Reverse-factoring is a financing option where a 3rd party financial provider finances the supplier on behalf of the buyer. The process involves the supplier, the buyer and the finance provider .The supplier sells the buyer’s unpaid invoice to the finance provider and receives the cash quickly, the buyer also gets longer to pay for its goods.
Recourse and Non-Recourse Factoring
Resource factoring is a form of finance where a company sells its invoices to a factoring company. The factor pays the company a percentage of their cash value and then chases up payment of the invoices on behalf of the company. Non-Recourse factoring is a form of finance where a company sells its invoices to a factor and receives a percentage of the cash value from them.
What are the advantages and disadvantages of debt factoring?
- Improved cash flow - release money tied up in unpaid invoices and boost your cashflow
- Save time- relieve your business of the burden of credit control and concentrate on your core business
- Bargaining power - debt factoring can help you to negotiate better terms with your suppliers
- Faster growth - grow your business at a much faster rate due to the flexible funding line
Disadvantages of debt factoring:
- Reduces overall profit - the factor always charges a percentage of the overall invoice value
- The factor takes control of the collections process - although a positive for many SMEs, some businesses may want to retain this control and maintain their own relationships with their suppliers. We do have other products available that allows SMEs to keep control so please contact us to discuss this in more detail.
How does debt factoring work?
Debt factoring is a form of business funding and uses one of the most significant assets your business has - your accounts receivable.
Your debt factoring provider will chase the debtors for payment of the invoices and collects the full invoice payment from your customer and pays you the outstanding amount, minus a small fee.
The business will be given up to 90% of the invoice value almost immediately from the point of raising the invoice, therefore reducing the cash deficit for the small business.
Debt factoring companies are proven to help businesses grow and prosper and is an excellent alternative to a bank overdraft.
Is debt factoring right for your business?
Generally speaking, debt factoring is best suited to companies that sell to other businesses on credit terms, and turnover more than £50,000 a year.
Why choose debt factoring with Novuna Business Cash Flow?
We are an award winning debt factoring company
Our debt factoring service is highly recommended by our customers
"The communication and support has been outstanding. Providing me with all the information I needed regarding new clients coming onto our books. The system they use is so user friendly and the drawdown payments are very efficient in the fast moving world of temporary payroll."Read full review
Debt factoring has been revolutionised with our digital onboarding process
Want to learn more about how you can boost your businesses cash flow?
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