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• 08 Dec

  What Is Factoring

  

  To answer the question "What is factoring?" you first need to understand that factoring falls within a family of working capital finance products for businesses known as "receivables finance". The factor that unites these products is that they release cash from trade receivables by way of making a prepayment against unpaid debts. The product is summarised in our Invoice Factoring product description.

  Trade receivables are unpaid debts outstanding to suppliers from debtors. These may be open account invoices raised on credit terms or other types of transactions e.g. applications for payment in the construction sector.

  The effect of using the service is to improve the cash flow of your business. The funding generated increases your available working capital, as you are no longer having to wait for customers to pay before being able to use that money.

  What Is Factoring?

  The aspect of factoring that distinguishes it from other forms of receivables financing, is that it includes a credit control service within the offering. This means that the factoring company will handle the credit control on behalf of the supplier that is receiving the prepayments.

  Factoring Definition

  This is our definition of what factoring is:
  
  "Factoring is a financial service for businesses that provides both prepayments against unpaid sales invoices raised to other businesses, and a credit control service."

  The extent of the credit control service can vary considerably between providers. In some cases, it is fully comprehensive, such that the user doesn't have to retain any credit controllers. In other cases, it may be a more superficial service, only sending paper chasing correspondence, or chasing only the larger accounts. In these cases, the credit-control is more a risk control mechanism for the funder, rather than a beneficial service to the supplier.

  Product Variants And Operation

  To understand more of the details the wide range of product variants, and the way that these services operate, please see our comprehensive Factoring Guide.

  By Glenn Blackman