It can be done. Although you pay a service charge to your Factor you can save money!

Look at a business with annual sales of £1m. It manages its own ledger and collects invoices in an average of 80 days (on terms of net monthly this is highly plausible). The business is owed, on average around £220,000. Its bankers provide an overdraft of £100,000 secured on all the assets of the business with the extra comfort (to the bank) of a second charge over the Director's home.

The business trades profitably, albeit on fine margins and the suppliers give nothing away.

The business starts a factoring deal with the factoring company charging 1% for the service (£10,000) with interest on funds used at Base Rate plus 3%.

At first sight it may seem that the business has simply incurred an extra £10k of cost for access to more money (80% against eligible debts. The £220k debtor book was reduced to £205k after the factor removed debt over 90 days old & a small contra account, so £164k was available)

Look at what the business gets for its £10k. After 9 months the Factor had reduced the average collection period to 69 days so average outstandings were reduced to £190k.(They also all but collected the old debt which had affected the funding at take-on, debt which the business, 9 months ago was beginning to give up on)

The business was able to renegotiate agreements with a number of suppliers whereas previously suppliers had been kept waiting as long as possible. Early settlement discounts were put in place with a considerable bearing on margins and overall profitability with this increased profitability ultimately driving the business value ahead.

The business proprietor and his staff had historically spent too much time on sales ledger administration and specifically collections. As is so often the case business proprietors tend to be better at selling than collecting and as soon as the factor became involved the boss had more time & collection performance improved!

With more time sales began to increase with new customers attracted by the terms offered. Margins were improving because of the supplier deals struck so this increase in turnover made a serious contribution to profitability. Administrative overheads were not affected.

Overall some of the benefits are quantifiable - bad debts, interest savings, ledger management, collection performance. Some can't be quantified such as freeing time, peace of mind with credit cover, not worrying about how to juggle suppliers & so on. Don't think of the cost of Factoring as pure overhead, please get in touch and we'll show you how your business could benefit

By the way you don't pay Factoring Partners a penny. We are paid by Factors for successful introductions.