Guide To Factoring

Factoring is a service for businesses to sell their outstanding invoices. This process allows companies to maintain cashflow by avoiding the typical 30 – 90 day wait for payment. The business receives upto 80% of the invoice value which allows them to manage their cashflow efficiently.

Factoring is not a loan and involves 3 parties:

  • the business that sells the invoice (YOU)
  • the customer that has to pay the invoice ( YOUR CLIENT/CUSTOMER)
  • the factoring company that buys the invoice at a discount and collects 100% of the invoice (FACTORING COMPANY)

Factoring Advantages

  • receive outstanding money quickly within 48 hours
  • removes hassle of collecting debt
  • can be used to support growth
  • a private and discreet method of getting paid early
  • cheaper than business loans and overdrafts
  • can reduce administration costs

There are over 65 factoring companies operating and it can be a challenge to find the right one for you. We recommend sourcing a local factoring company for the best results.



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Glossary of terms used in and around Factoring

This simply stands for Asset Based Lending.

Accounts Receivables
Monies owed by your customers that you have raised invoices to on credit terms.

The percentage that a factoring & invoice discounting specialist will advance against an invoice.

Advance rate
An agreed percentage of eligible debts available for you to draw down.

Approved debt
A debt that a factoring & invoice discounting specialist has accepted as being eligible for prepayment.

Assignment of debt
The transferring of ownership of the rights to the money due against an invoice. It transfers the ownership from the client to a factoring & invoice discounting specialist.

This stands for Bankers Automated Clearing System. This is an electronic system used to make payments. BACS usually takes approximately 3 working days to clear.

Cash flow
A measurement of the free cash your company gains or loses during an accounting period.

Cash Invoice
This is an invoice where there can be no period of credit and payment is therefore due upon delivery and receipt of the goods and/or services.

This stands for Clearing House Automated Payment System. An electronic payment system that guarantees same day payment.

These are the fees charged by a lender to make CHAPS transfers.

This simply stands for Client Handles Own Collections. It is a type of factoring facility where the client is able to handle their own credit management.

Confidential CHOCS
This is a facility where clients notify individual invoices as they would with factoring but keep control of the credit management function. This is a fully confidential facility thus there is no disclosure on the invoices.

Confidential Invoice Factoring
This is an invoice factoring facility where a factoring & invoice discounting specialist makes contact with customers as if they were the actual client. This means that the customers are unaware of the factoring company’s involvement.

Confidential Invoice Discounting
This is a facility where the invoice discounting company provides a finance facility but takes no active involvement in collecting the client’s invoices and there is no disclosure on the invoices. The facility is fully confidential and customers are unaware of any lender involvement.

Credit Protection
This is a product that protects a client against non-payment from their customers as a consequence of business finance.

Credit Terms
These are the payment terms that are given to customers and indicate when payment falls due. An example would be 30-day terms and these should be shown on invoices.

The parties that owe money to your business.

Disclosed Invoice Discounting
An invoice finance arrangement similar to confidential invoice discounting but isn’t confidential. This means that your customer is aware that their debt has been assigned to a factoring & invoice discounting specialist but you still collect the debt.

Discounting Charge
The charge for borrowing money and is usually shown as a cost over base rate. It can be equated to the interest rate paid on an overdraft facility.

Export Factoring
A factoring facility provided to a client who invoices customers abroad.

Extended terms
Customer payment terms in excess of 30 days end of month.

Another name for an invoice factoring facility.

A document that details the payment required for goods or services that have been provided.

Invoice Discounting
A type of facility where an invoice discounting company provides finance secured against debtors but provides no credit management service.

Invoice Factoring
A facility where an invoice factoring & invoice discounting specialistprovides finance against invoices as well as providing a cred it management service.

Invoice Finance
An umbrella term for finance that is provided where the debtor book is used as security. Two examples of invoice finance are factoring and invoice discounting.

Notice of Assignment
The wording required to be included on invoices for a disclosed invoice discounting facility.

When an invoice is issued prior to goods or services being delivered.

Money that a factoring & invoice discounting specialist will pay against an invoice normally expressed as a percentage.

Proforma Invoice
An invoice to be settled on cash terms.

Proof of Delivery (POD)
This can be any document which confirms the successful delivery of goods or completion of a service to an end Customer.

Purchase Ledger
The ledger that shows all the outstanding purchase invoices due to creditors.

This means that an invoice will be given back to the client by a factoring & invoice discounting specialist if the customer fails to pay within an agreed period known as the recourse period.

Refactoring Charge
A fee charged by a factoring & invoice discounting specialist when an invoice is recoursed back to the client. It is usually expressed as a percentage and then charged against the VAT inclusive invoice value.

Remittance Advice
A confirmation document from the customer detailing which invoices are to be paid in their next payment run.

Sales Invoice
The invoices raised by a client in relation to products sold or services provided.

Sales Ledger
The ledger that shows all the outstanding sales invoices that have been sent to customers and remain unpaid at any point in time.

Service Fee
The fee that a factoring & invoice discounting specialist charges for the administration of the facility. It is usually expressed as a percentage and is charged against a clients VAT inclusive turnover.

Staged Invoicing
Where an invoice is raised for work completed but prior to the completion of all of the work detailed on the original purchase order.

This is a type of audit/due diligence undertaken by a factoring & invoice discounting specialist at a potential clients premises prior to a facility being offered.

Trust Account
This is the account set up for an invoice discounting client into which they pay the money they receive from debtors.