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Factor Your Debts |
If you sell on credit, it is likely that some of your customers will not pay promptly after receiving goods or services, or that some will fail to honour debts altogether. This can obviously have serious consequences for your organisation's cash flow.
Selling Your Debts
Essentially, factoring involves selling details of money owed to you for immediate cash payment. The factor will then collect the debt, and you can typically expect to receive 80 per cent of the face value of the invoice, with the balance paid when the debt is collected. This arrangement is usually intended to pursue debts owed to you from other businesses, rather than from individuals. It continues on an on-going basis. Some factors may also offer insurance against bad debts.
Different types of factoring are available, depending on your needs. For example, full service may involve the factor taking on all your debts; a less complete service may stipulate that the customer pays you, and not the factor - or that the factor does not take over your records.
Factoring may sound like the ideal solution to your cash flow problems, but it is not for everyone. Considerations include:
- The size of your sales - you may find it difficult to factor debts if your sales are less than 100,000 a year
- Your own trading record - a factor will investigate your credit rating and debt history before offering you services
- Contractual obligations - many factors will ask you to sign a year's contract with a lengthy notice period
It is worth remembering that separate aspects of factoring, such as the collection of cash, credit insurance and invoice discounting, are available through separate organisations. It may be cheaper and more useful to compare the individual costs of these services with the more complete packages offered by different factoring companies to see which matches your business interests.
Xbridge can source quotes from a number of Factoring Service Providers on your behalf - click here to start.
Action Checklist:
- Decide what level of service you need - assess your cash flow requirements and the resources you have in-house
- Shop around for the best suppliers - it may be best to source different factoring services from different companies.
- Contact the Factors & Discounters Association to find more specific information and a list of its members.
- Assess your credit risk - it may be possible to minimise late payment
- Make sure your customers are made aware of your credit terms.
This is a guide. It may be helpful for you to speak to an advisor in factoring. E&OE. © Copyright Business Europe 2002
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