Factoring Articles

The Two Things You Need To Know about Debt Factoring

There are some popular misconceptions about factoring in the business community. UK business owners and financial managers can make expensive mistakes when they choose the wrong factoring facility. We are going to have a look at a couple of misconceptions here:

·       Factoring is intrusive to my customers and suppliers

·       Most all factoring companies are the same

Let’s take a step back and recap what debt factoring is before examining these two popular business misconceptions.

Today’s businesses need cash flow and working capital to survive. Many traditional sources (bank loans) have either disappeared, dried up or simply are not available in the current business climate.

So how do business owners resolve these temporary cash crunches? One strategy is known as debt factoring, while a second is a term loan, which has fixed payments, and usually extends for three to five years. A business owner must decide whether to focus on permanent working capital via a term loan or more owner equity or short term working capital meaning --  a debt factoring solution.

Now we can clarify two myths surround debt factoring. The traditional model of debt factoring is in fact intrusive because a factor firm has the ability to take control of your entire debtor inventory, including invoicing your customers with notification from themselves, insisting that  payments being made directly to their firm. Yes, this is intrusive.

However, newer alternatives for debt factoring include spot factoring, which does not involve committing the whole of your ledger to the factor. This way you still manage your customers.  The customer is notified of the transaction to sell their invoices and told that they must pay a factoring company, but that is it.

A small business will reap the benefits of factoring including increased working capital while at the same time preserving the good will of customers. 

As for the second misconception – 'all factoring firms are the same' – nothing could be further from the truth as some debt factoring firms in the UK are usually bank owned and  operated, yet many are independent, with their own capital and borrowing structure. There is much flexibility when it comes to structuring a deal that will work for you and them.

When IFG talks to potential clients about debt factoring, we recommend they focus on finding the most appropriate solution for them which will put them in a position to reap the key benefits of the finance facility, which is working capital they did not have before.

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