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What is Debt Factoring?

If you’re asking yourself “What is debt factoring?” read on to learn the business definition of debt factoring, how it works and how it helps thousands of UK businesses every year.

What is debt factoring?

Debt factoring is considered an alternative term to invoice factoring and takes place when accounts receivables, typically in the form of invoices, are raised by a business and passed to a debt factoring company for them to provide a cash advance – usually over 85% of the invoices’ value. The factoring company also takes care of chasing collection of the owed payment on behalf of the client – when the payment is made, the remaining value not initially forwarded is given to the business minus prearranged fees for their service provided.

The more that you explore our invoice finance product pages, the more that you’ll discover that this increasingly popular cash flow solution encompasses a wide range of products – each tailor-made to suit different businesses in different economic situations

Debt or invoice factoring is ideal for businesses that need help to manage their sales ledger. Alternatively, some firms who’ve spent years developing their in-house credit collection systems prefer to retain control of their sales ledger, meaning that they’ll often lean towards an invoice discounting facility or factoring financiers who allow clients to handle their own credit control (CHOCC).

The requirements

Those companies wishing to access a debt factoring facility will need to consider whether they fulfil the following qualification criteria…

  • Debt factoring financiers look for their clients to show that they’ve consistently achieved an annual turnover of £50,000 or more for several years beforehand.
  • Most funders will only strike up arrangements with those businesses operating in the UK, rather than firms based abroad with UK branches / commercial activities.
  • You’ll also need to ensure that the credit terms offered to your customers when raising invoices span from 30 to 90 days.

Debt Factoring Advantages

Here are some of the specific business advantages that set debt factoring apart from the rest of its invoice finance counterparts, helping your firm to decide whether it’s the most suitable arrangement for your present situation and commercial objectives…

  • Possibility to Grow More Quickly – through shrewd decision making and reinvestment your trade and operations can grow and not be held back by the usual payment terms
  • Saves Yourself Time To Be More Efficient – if managing credit collection impacts your resources greatly, debt factoring can allow for someone else to deal with your sales ledger management and free up time and money to allocate to higher priority projects
  • Fast, flexible funding – whereas other funding facilities such as overdrafts are more restrictive, a debt factoring arrangement can grow in tandem with your business. As the volume/ value of work you acquire increases, then, so too will the funding provided by your funder.

Find out more

We hope that this guide has served as an insightful introduction to the workings and benefits of debt factoring facilities, not to mention the numerous commercial challenges which this acclaimed cash flow solution helps UK businesses overcome every year.

Additionally, read our overview of the various factoring arrangements available if you’re unsure as to which product is the most suitable for your present financial situation and future ambitions.

For further details on the subject get in touch today and one of our expert consultants will gladly help to answer any of your questions and find the most suitable facility for your business.

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