One question people always ask is whether or not debt financing costs much. When talking about the cost of factoring, the terms agreed between the small business and the factoring company is what makes up the cost. Typically, debt financing is done by exchanging one form of an asset, usually future collectable invoices, into another form of asset. This is normally the current cash of the invoice at a discounted rate.
There are several types of factoring; the first of which is called "with recourse" and the second is known as "no recourse." Factoring companies in the UK are inclined to prefer recourse factoring due to the fact that the risk of customer default will be shared between both companies - the factoring company and the small business. If the factoring company is responsible for a small amount of risk, the factoring costs will also be proportionately small. If the small business has loyal customers and is positive and confident that they will pay back the receivables, then an agreement with recourse is probably the best course of action to take.
When the factoring company carries all the risks involved it is known as "no resourse" factoring. This is when the small business has transferred all of its risks to the factoring company. This type of agreement is appropriate when the company is in doubt about the paying capability of its customers.
A factoring company usually always performs a detailed due diligence for each of their customers. Should the assessment hint that there is still a good chance of payment, the factoring company would agree to the no recourse factoring agreement in which case they will charge a higher discount rate, and this means a higher cost for the small business Why? Becaiuse of the risk that is still carried by the factor.
Does factoring involve a fee? Yes. As with any other financial business, factors do charge fees. Conditions where fees are applicable can be read in the factoring contract's legal terms. Some factoring companies impose a minimum number of receivables to be processed each month, and the exact number will vary according to the sales of the small business. There are very few faactoring companies offering single invoice factoring where a customer can factor one invoice at a time. Also known as "spot factoring" there is no contract, or minimum quantities.
You need to determine if debt factoring is for you, as it can provide great benefits for your company as long as all of the conditions favours your company's growth. A legal agreement should always be reviewed by a lawyer. Think of it as safety fee, ensuring the contract is not hurting your business.
If you would like to find out more about the flexible invoice discounting company, please just search online and contact one of the top providers listed on page one of the search engine.
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Kristin Gabriel writes for The Interface Financial Group (IFG). IFG provides short-term financial resources serving clients in more than 30 industries including invoice factoring. IFG offers expertise in construction factoirng, accounting, finance, law, marketing and banking. Visit http://www.ifgnetwork.co.uk
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