In effect, the invoice financier buys the debt owed to the
company by its customers. Usually, the invoice factoring service takes
responsibility for managing the sales ledger and for collecting accounts
receivable on behalf of the company.
A charge is made for the service, typically between 1 and 5 percent of
the invoice amount. Initially, around 85 percent of the invoice amount
is released to the business. Later, the balance less any interest, fees
and other charges is settled when full payment is received from the
For instance, a business raises a customer invoice for £20,000. This
account payable is sold to an invoice financier for £17,000 (85 percent)
with quick settlement. The factoring house then collects £20,000 due
from the customer and then pays the supplier £3,000 less interest and
fees when they receive the money.
Is it a boon or are there drawbacks?
Financial liquidity is improved; the regular flow of cash
into the business’s bank account reduces bank interest and charges. The
business also saves time that might otherwise be spent processing and
chasing late payments, so reducing workload and extra administrative
costs. It is then free to focus on productive core business activities.
Credit checks are carried out on some new customers to reduce any risk
of payment problems. Because of this or through other business
communication, the company’s customers may become aware that the
business is using a financing service. Some of these customers also
prefer to deal directly, not with third parties. It may be possible to
work around this if the invoice financier provides a discreet service
and presents an integrated image - some providers refer to their service
as outsourced administration and credit control, rather than finance.
Usually, factoring is available for commercial (B2B) invoices, not to
retail customers. It may reduce the availability of other funding as
book debts are no longer considered as an asset.
Fees are charged based on the service and support provided but are a
disadvantage, as they reduce overall business profit.
A business example
I One very satisfied construction services supplier
mentioned in a testimonial that in the building trade, it is crucial
that the factoring provider understands the industry well. This
executive went on to commend the specialist knowledge and service over
six years. He also considered that without the cash flow advantages and
other support received, he might not even have continued to be in