Understanding Accounts Receivable Factoring

Where SMEs sell their outstanding invoices to a third party at a reduced rate, securing an immediate boost in cash flow.

Boost your cash flow with accounts receivable factoring

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What is Accounts Receivable Factoring?

Accounts receivable factoring: when a company sells its invoices to a third-party at a discount for immediate cash, improving cash flow without taking on additional debt.

How Does Accounts Receivable Factoring Work?

Once a business has sold its invoices to a factoring company, they will be charged a factoring fee, which is commonly a percentage of the amount of receivables being factored. This amount can depend on a number of things, including the industry your business operates in, amount of receivables being factored, quality of your customers and the average number of days outstanding in receivables.

Main Benefits of Accounts Receivable Factoring

Improves Cash Flow: Receive immediate cash for your invoices.
Avoids Additional Debt: No need to take on loans or additional debt.
Fast Access to Funds: Quick and easy process for accessing capital.

Other Types of Factoring

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Spot Factoring

Spot factoring is a way for a business to access funds by selling unpaid invoices to a 3^rd party, a spot factoring company, on a one off basis in order to receive payment quicker.

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Reverse Factoring

Reverse-factoring is a financing option where a 3rd party financial provider finances the supplier on behalf of the buyer. The process involves the supplier, the buyer and the finance provider .The supplier sells the buyer’s unpaid invoice to the finance provider and receives the cash quickly, the buyer also gets longer to pay for its goods.

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Recourse and Non-Recourse Factoring

Recourse factoring is a form of finance where a company sells its invoices to a factoring company. The factor pays the company a percentage of their cash value and then chases up payment of the invoices on behalf of the company. Non-Recourse factoring is a form of finance where a company sells its invoices to a factor and receives a percentage of the cash value from them.

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Debt Factoring

Debt factoring is a finance facility provided by a debt factoring lender to help businesses leverage their acccounts receivable enabling them to instantly inject cash into the business. The debt factoring company pays the business a percentage of the total amount charged to the client and usually takes full responsibility for collecting the payment from the buyer.

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Advantages and Disadvantages of Accounts Receivable Factoring?

Advantages of accounts receivable factoring:

This is a very simple form of commercial finance, and the main requirement is usually a client base with good credit.
Your own credit history is not usually considered, so if you have adverse history or have not been operating for a large period of time, you can piggyback on the good credit history of your clients.
Once your invoice has been sold, the factor will be the ones that chase the payment, meaning you no longer have to worry about playing the role of collector, and once the invoice has been paid, the money will be returned to the company they bought the invoice from, minus their fee.

Disadvantages of accounts receivable factoring:

You have to pay a fee to use this service, factors often buy invoices at discounted prices, meaning you’ll receive less money than if you processed your own invoices.

Why Consider Accounts Receivable Factoring?

There are many reasons why a business may factor an invoice, including increasing cash flow and mitigating credit risk.

Factoring is a financial transaction where a company sells it receivables (invoices) to a factor, who collects the payments directly from the business’ customers. Most businesses choose this option if they want to receive their cash up front instead of waiting the duration of the agreed invoice payment terms.

Once a business has sold its invoices to a factoring company, they will be charged a factoring fee, which is commonly a percentage of the amount of receivables being factored. This amount can depend on a number of things, including the industry your business operates in, amount of receivables being factored, quality of your customers and the average number of days outstanding in receivables.

What is the Cost of Factoring Receivables?

As the factoring company takes a risk when taking on account receivables it charges a fee. The fee will vary depending on the provider and these fees are often negotiable.

The costs will depend on the services required and these can be broken down into the following:

Discount charge - this will vary but can range from 0.5% to 5% and is calculated on the value of the invoice
Credit Management fee - this is the cost for credit checking the buyer along with any administration costs associated with providing the service

Credit protection fee - this will only apply if you have chosen non-recourse factoring where the lender takes the risk for non-payment
Notice period to end the service - this can vary but all charges must be paid during this notice period time

Why Choose Novuna as Your Accounts Receivable Factoring Company?

6 month trial period

A 6 month trial period so you can be sure the product is right for you, followed by a 6 month rolling contract – we don’t tie our clients in for long periods.

Digital onboarding

We are the first in the market to offer a digital onboarding process and have been leading the way with our digital capabilities allowing clients to sign up within 24 hours from the first appointment.

Client trust account

Once you become a client you will be given your own trust account, meaning you will get same day availability on your funds. You can also view all of your invoices and payments online at a time suitable to you, 24/7.

No uncleared effects

We have heavily invested in our digital capabilities. This includes the auto allocation of payments using Artificial Intelligence. Ultimately this advance in technology means that our clients access money quicker as well as saving money on interest charges due to auto allocation.

Simple pricing

We aim to make the process of Cash Flow finance as simple and straightforward as possible. Our pricing is very straightforward to understand. For a no obligation quote or an informal chat you can call our friendly team today on 0808 250 0859.

Award winning service

We offer award-winning client services and individual Relationship Managers who are on the other end of the phone or out in the field to visit you in person.