What is Debtor Factoring?
What is Debtor Factoring?
Debtor or Invoice Factoring takes place where an agent (or factor) buys all or some of a company’s outstanding invoices outright, advances up to 90% of their value and repays the company the remaining amount, minus a commission plus interest on the advance when the accounts are settled.
The amount a factor is willing to advance will depend on the calibre of the debtor. Not surprisingly, the company would expect to be granted a higher percentage on money owed by a blue-chip company or household name compared to a sole trader. The factor then administers the sales ledger, taking responsibility for the debts, sending out account statements to the client and chasing up outstanding payments. With recourse, the factor may be able to pass bad debts back to the company if these are incurred. [With thanks to The Factoring Helpline].
Analysing the overall impact of a debtor financing package isn’t straightforward as there are a number of moving parts – debtors book, % advances, finance charges and commissions, interest on the factoring advance, bank interest on both positive and negative balances and cashflow timing.
How can Forecast 5 help track the effect of Debtor Financing?
Forecast 5’s Factoring feature enables the finance team to structure & optimise a company’s balance sheet and cashflow for a number of different alternatives:
- to maintain a required positive bank balance, or
- to minimise an overdraft, or
- to achieve an agreed amount of debtor finance, and / or
- to improve working capital by obtaining the maximum value of debtor finance.
Whilst the opportunities above can be applied to the company’s debtors book, they can also – where relevant - be applied to a company’s sales. In both, to avoid the possibility of double discounting, its important to keep an eye on the timing of sales or debtors.
To see how Debtors Factoring can transform your balance sheet and cashflow by using one of the buttons below:
Images: Matthew Henry (Burst) & Michal Jamoluk (Pixabay)
