Factoring advantages and considerations

Factoring for managing debtors

Factoring, the practice of selling your invoices to a company in return for funds in advance, offers a number of practical benefits, particularly in managing debtors. However, as with any form of business finance, it's important to consider whether it is the right solution for you first.

The importance of cash flow

Managing debtors is not only time-consuming, but when invoices remain unpaid until the last possible moment, it can have a serious impact on your cash flow and your ability to operate smoothly.
If outstanding amounts build up significantly, you may be unable to meet financial commitments, damaging relationships with both suppliers and staff.

Why choose factoring?

When you engage a factor company, you receive a percentage of the value of each invoice - up to 90% if you're a Lloyd's TSB Commercial Finance customer - within 24 hours of the invoice being issued.
Because you don't have to wait for up to 30, 60 or even 90 days for funds to come into your business, managing debtors has less impact on your operation and cash flow.

The advantages

Factoring offers a number of advantages in avoiding the problems associated with late payment and debtor management.

The only assets required to borrow against are your invoices.
Without a gap between providing goods or services and receiving payment, you can get on with producing your next order.
Managing debtors' outstanding invoices no longer makes it difficult to cover internal costs.
Factoring is a flexible form of finance that allows your business to grow as sales increase
Most factoring companies offer a degree of credit management, saving you time and resources managing your debtors, that you can reinvest in other areas of the business.

Considerations

While a flexible and accessible form of finance, it's important to consider all aspects of factoring in relation to your business. Things to consider include:

The factor company will retain a percentage of each invoice value, meaning a reduction in your profit margin.
It's not possible to borrow further against any debts you factor.
Managing your debtors is still important, as all outstanding invoices must be settled before you can end factoring.
Outsourcing debtor management to a factor company may impact on your customer relationships if they would prefer to deal with you directly.
It's very important to use a reputable factor company.

Debtor management through factoring

Managing debtors is a key concern for any business and factoring can provide a useful solution. By considering both the pros and cons, you'll be more able to make an informed decision on its suitability for your business.
If you feel factoring could help you in managing your debtors, find out more about factoring from Lloyds TSB Commercial Finance

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Lloyds TSB Commercial Finance Factoring Guide