Sometimes referred to as a Full Service Factoring, this provides the complete answer to slow-paying customers, shortage of working capital and if needed, protection against bad debt losses. If credit protection is part of the Factoring agreement, it is referred to as “non-recourse” Factoring. A Factoring agreement where the credit risk on the debtor remains with the seller is called “with-recourse” Factoring.
With a Factoring solution the Factor agrees to pay an agreed percentage of approved debts as soon as he receives an assignment, or notification, of the invoice. The percentage depends upon a number of factors, but 80-85% is common. The balance, less charges, is paid when the customer pays. This flexible finance keeps pace with business growth as the funding is dynamically linked to the turnover of the company. The Factor will also undertake all credit management and collections work, following an agreed credit policy designed to ensure faster customer payments without loss of goodwill. The savings in administration are substantial and faster customer payments mean lower levels of advances and lower interest costs. There will normally be a charge for the collections service and, if it is required, for bad debt protection; this will usually be expressed as a percentage of turnover. An offer of factoring will take the form of a formal quotation after the Factor gains an understanding of a business and the workload to be undertaken.
For finance provided in advance of collections there is usually a discount charge calculated on the day-to-day usage of funds. It is likely to be comparable with normal secured bank overdraft rates. This type of finance is generally of interest to start-up and SME sized companies.
Factoring is offered in all EU countries and is especially important in the more emerging EU markets.