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What is Factoring

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What is Factoring? What does it do? What are its Benefits?

If you own a business that sells to customer on credit terms and you need some kind of business finance for expansion or just for day to day operating expenses, then you should consider Factoring.

Factoring, sometimes called cash flow financing, is simply a method of business finance, which releases the cash, already tied up in accounts receivable for immediate use in your business. It allows you to raise finance based on the value of your outstanding invoices. It also gives you the opportunity to outsource some of your sales ledger operations and to use more sophisticated credit rating systems.

Once you have set up a factoring arrangement with a Factor, it will work as like this:

Once you make a sale, you invoice your customer and send a copy of the invoice to the factor. Most factoring arrangements require you to factor all your sales. The factor pays you a set proportion of the invoice value within a pre-arranged time – typically; most factors offer you 80-85% of an invoice’s value within 24 hours of confirmation.

The major advantage of factoring is that you receive the majority of the cash from debtors within 24 hours rather than a week, three weeks, 2 months or even longer.

In return,

* The factor issues statements on your behalf and collects payments – this includes contacting late payers by phone and pursuing outstanding invoices. It is in your interest to participate in this process and assist with collections as the sooner the invoice is paid, the cheaper the financing cost. It is important to remember that usually your company will remain responsible for reimbursing the factor for bad debts, unless you have arranged a ‘non-recourse’ facility.

* You receive the balance of the invoice (less charges) once the factor receives payment.

* The factor provides regular reports on the status of your sales ledger – you should expect regular statements. Many factors can offer you instant online account information.


Benefits that you receive through factoring may vary from business to business, however the increased cash flow is the one factor common to all of them, and therefore, the business may experience the following:

· Increased sales through increased production

· Reduction in administration overheads

· Carry more finished stock for sale

· Increased profit through increased sales and overhead reduction

· Ability to engage additional sales staff

· Funding an expansion of promotions campaign

· More aggressively seek new business

· Increase orders by offering your clients credit terms

· Receive supplier discounts for paying COD (Discount for cash)

· Increased buying power, bulk buy and order by the box-full and receive further discounts.

· Enhanced credit rating, through paying creditors on time

· With discounts on supplies, you can have the competitive edge on your opposition

· Be cash ready to fund unusually large orders

· Have the confidence to take on new accounts

· Tax deductible – all fees are fully tax deductible

· Effective time management – no need to waste your valuable time chasing accounts.

· Enhanced credibility with customers – they now know you have the ability to fulfill orders consistently (very useful when working with blue chip companies)

If you would like more information on factoring and how it might assist you in managing and expanding your business; call Nova Business Finance on 1300 1386 186 or email us at sales@nbf.com.au

Visit Nova Business Finance at www.nbf.com.au

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posted in Factoring, Growing your Business, Working Capital by Small Business Finance News

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