What is Debt Factoring and how can it benefit your business?

March 5, 2024
Jamie Blow

Debt Factoring is an alternative term for Invoice Factoring or Invoice Finance. When a company raises invoices on credit terms to their customer,  these are then passed on to a factoring company who will advance up to 90% of the value back to them. This is done to maintain a solid cash flow, and increase working capital. Some Invoice Finance lenders also work by purchasing your invoices. This process follows you selling your invoice to a lender for a percentage discount. They will then collect the funds tied up in the invoice themselves, and therefore collect their fee. As a business, selling your invoices is a very viable option, as the criteria for entry is wider, and it is a very simple process.When the invoices are settled (on or around the due date) funds are paid directly to the factoring company, who will pay the remaining funds back to their client minus any pre-agreed fees for their services. Typically, Factoring companies will also take care of the collection process on behalf of their customer. There are other types of Invoice Finance that allow you to maintain management of your collection process. The management of this side of the process is important to some companies, as it keeps them in close contact with their clients. Facilties such as CHOCCS (Client Handles Own Credit Control Services) and CID (Confidential Invoice Discounting) will allow for this to happen.

It is important to be aware that this type of financial offering will only work on a B2B basis where invoices are raised in arrears for work completed or services rendered.

Invoice Finance is an extremely popular solution within the Alternative Business Funding landscape, allowing companies to maintain a consistent cash flow. It is especially prevalent in the construction, recruitment and wholesale industries, but works for most other industries who run the majority of their income through term invoices. Factoring facilities can be tailored specifically to your companies requirements, making it perfectly suited for the way you work. If over the years you have developed an in-house credit collection system, you may want to continue to handle your own credit control.There is a product especially designed for this, known as CHOCCS (Client Handles Own Credit Control Systems). It is facilities like CHOCCS that are good examples of the ability to tailor an Invoice Finance facility to your wants and needs.

Do I qualify for Debt Factoring?

To qualify for Debt Factoring, there are certain criteria:

You must be able to show your financier that you are consistently turning over a minimum of £50,000 annually (or if you are a new start, projecting this in year 1). This level of revenue is important, as if you do not meet this, there will not be enough money being put through the facility. Some lenders will opt for higher revenue levels, some as high as £1 million, and these typically will have better services, and other benefits. This is becasue they have fewer clients, meaning they can focus more on each customer.

Your main office headquarters must be in the United Kingdom, and you must be registered as a Limited company or a Partnership under Companies House.

You will also need to provide an invoice with proof that your payment terms are between 7 – 120 days.

No adverse credit history, CCJs, or criminal convictions.

This criteria differs from lender to lender, although this is the typical minimum requirement. This is put in place to ensure that the clients taken on by the lender fit their level of risk comfortability.

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What are the advantages of Debt Factoring?

Debt Factoring has plenty of advantages:

Release funds tied up in invoices that can be used to boost working capital, fund new projects, pay wages and ensure payments to suppliers. Some companies using invoice finance can secure early payment discounts with their suppliers.

Flexible facilities mean that if the levels of income differ from month to month you are not unnecessarily penalised.

Unlike a traditional bank overdraft,there is no ‘maximum limit’ and the level of funding can be increased in line with the value of invoices you raise, there are no limitations to this.

Passing over the collection of payments owed to you to a Factoring partner will free up your time to concentrate on your core activities and can reduce the stress related to this process. You will never have to continually chase a customer for payment, as someone else can do this for you.

Other Funding Solutions

There are plenty of other solutions for your finances outside of the Invoice Finance market. The Alternative Business Funding market is currently growing rapidly, and is full of another extremely beneficial products for SMEs. A loan in its most simple form is a sum of money transferred to a company from a lender to be paid back over an agreed period of time, plus interest. These are useful for companies, as it can massively increase their available working capital, and therefore boost their cash flow. There are numerous options when it comes to Business Loans, with Secured and Unsecured being the main two choices. Asset Finance is another form of an loan, although this is more of an alternative form of funding, compared to the more traditional options. This type of facility is tailored towards allowing you to purchase assets that will benefit your business. You can purchase resources, plant, vehicles or equipment for your company. This is extremely beneficial, as said resources could give you access to works that previously you couldn't handle. The costs for Business Loans can vary massively, with anything between 1-30% interest being added. The costs added in the form of interest are dependant on the product you opt for, the strength of your company profile (such as your credit history, turnover, and profitability) and the amount of monies borrowed. This is calculated due to the level of risk the lender deems fit to your company. Again, the criteria for a loan-based product varies massively from lender to lender.

The basic criteria for a Business Loan are:

£100k turnover, unless you are a new start-up.

1 years trading history; Similarly to Turnover, start-up companies can get a financial product. Once you have filed accounts for the year, we can then apply you to our panel of lenders.

Due to us dealing with UK Based Lenders, we can only find solutions for UK Registered Limited Companies.

If you don't fit this criteria, it isn't the end of the road. Contact us, and one of our specialist finance consultants will guide you on whay your best options are.

Jamie Davies
Managing Director

As a founder of multiple businesses, Jamie believes that mindset, discipline and ambition are key drivers for success, both for his businesses and for his clients. 

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Disclaimer: Spark Finance Ltd (Registered office - 18 John Stow House, London, England, EC3A 7JB, Registered Number 10128297) helps UK firms access business finance. Spark is a credit broker, not a lender. Any quotes provided are for information purposes only and subject to status and separate lender terms and conditions. Applicants must be aged 18 and over.  Guarantees and Indemnities may be required.  Spark Finance may receive commission from lenders  which may vary depending on the lender, product, or other permissible factors. The nature of any commission model will be confirmed to you before you proceed.

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