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A step-by-step guide to factoring

Category: Features — Mark on July 24, 2013

Factoring is a very easy way for a business to borrow money and while the process itself is simple, not all business owners are fully aware of how it works. With this in mind, here are the main steps broken down into plain English.

Step 1 – Identify invoices to borrow against

The first step is to work out which invoices to borrow against. Most companies do this simply by pulling out invoices that add up to the amount it wants to borrow.

At this stage, it is wise to select one or two extra invoices. This way, should the factoring company turn down one of the invoices, others will be to hand to use instead. Usually a company can borrow up to 90 per cent of the face value of each invoice.

It is important to bear in mind that most of the time the factoring company will be the one collecting the money from clients. Therefore, a firm that doesn’t want a particular client to know it is borrowing money may want to avoid including bills for that customer in the invoices being used.

Step 2 – Contact the factoring company

The next step is to contact the factoring company. The agent will ask a few questions to check that the invoices a business is planning to borrow against meet the criteria. At that stage, the agent determines roughly how much can be lent against those particular invoices. The agent should then also be able to explain what the charges will be.

Any special arrangements are also discussed at this stage. If a firm wants to be the one responsible for collecting the cash from customers or is looking to add insurance, this is when it should be arranged.

Once these discussions have taken place, the factoring firm will carry out a few extra checks and then send out a contract for that loan. If the company borrowing the money is happy, it signs the contract and sends it back.

Step 3 – Wait for the money to arrive

Once the factoring company has received confirmation of the contract, it will send the funds to the company’s bank account via electronic transfer.

Step 4 – Pay off the loan

When the company’s customer pays an invoice, it will normally be the factoring company which receives the money. At this stage, the factoring company will deduct what is owed and send the balance of the invoice to the company borrowing the money.

How long does the process take?

Looking at the process in detail, business owners would be forgiven for thinking it could take a while for everything to be finalised but in reality, it usually only takes a couple of days. Everything is done over the phone or via e-mail, so the process is very efficient. Occasionally, it takes longer, but the timescales will be explained when the loan is being arranged. Having as many details as possible to hand before contacting a factoring firm will really help to speed up the process.

Overall, borrowing money from a factoring company is a fast and efficient way to get your company the cash it needs to fund growth or to simply make the most of a big business opportunity.

'Disclaimer: The information contained in these articles is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.

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