Understanding the Basics of Debt Factoring

Understanding the Basics of Debt Factoring

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Debt factoring is another term for invoice factoring. What it means is that you sell your outstanding customer invoices to a third-party company, such as Thales Financial, who would then forward a percentage of the invoice amount (typically between 80% and 90%). Some debt factoring companies will pay the full invoice amount to the business. A fee is charged for this service, which is usually a percentage of the invoice amount (typically between 1% and 5%).

How Does Debt Factoring Work?

When a company enters into a contract with a debt factoring company, it can use its own customer invoices as a way to access funds to alleviate any cashflow problems it might be having. The business would decide which invoices to factor and then submit them to the factoring company. Once the invoices are approved by the factoring company, the funds will be forwarded to the business. This can happen in the same day, but often the funds will be available to the company the following business day.

What this means is that a business will not have to wait until the invoice is due for payment by the customer. Unlocking cash early allows the business to pay its own suppliers and staff in a timely manner.

The Benefits of Debt Factoring

As mentioned above, debt factoring means that a company can solve some of its cashflow issues. It can pay its suppliers on time, or even earlier if the supplier is offering a discount for prompt payment. Many businesses see the benefit of doing this, particularly if they are factoring invoices, as they can use the savings that they make to pay the fees for factoring.

Companies that pay their bills on time develop healthy relationships with their suppliers. This improves their reputation and their credit score, which puts them in good standing with new suppliers should they wish to get favorable credit terms.

If the debt factoring company takes responsibility for collecting the payment from the customer when it becomes due for payment, the business owner can save valuable time and resources on this too. Furthermore, if the business chooses a non-recourse factoring agreement, it is protected if the customer does not pay the invoice.

Debt Factoring versus Other Financing

There are other ways of accessing funding for a business, including business loans. When comparing the two, factoring comes out on top for many reasons. For starters, debt factoring is much easier to access than a bank loan, particularly for newer, small businesses with a limited credit history.

With funds often available within 24-hours, companies find that debt factoring is quicker and easier than applying for a bank loan. Moreover, because the factoring company does not require the business to have a credit history or a good credit score, it is a preferable option for many business owners. Even those that have a poor credit score because of making late payments to their suppliers can avail of debt factoring to get their accounts back on an even keel.

Companies that use debt factoring will usually pay the factoring company a percentage of the invoice amount for the privilege, so the higher the invoice the more they will pay. Nevertheless, as it is a short-term solution to cashflow problems, it is often seen as a better option than paying interest on a bank loan every month for several years.

To conclude, debt factoring is another name for invoice factoring and describes the process of selling outstanding customer invoices to a third-party company. This frees up cash and allows the business to pay its supplier invoices on time.

Finance