In simple terms, you assign your sales
ledger debts to the factor for a specified length of time. Typically
this will be twelve months, but some factors will now accept periods
as short as three months. They charge you a service fee for handling
the facility, and interest on the money which they are lending you
on the security of your invoices. The deal may be ‘without
recourse’, where the factor accepts the credit risk, or ‘with
recourse’, where you retain the credit risk. In certain situations,
such as exceptionally large value invoices, your factor may require
you to take out credit insurance, which will provide you with the
funds to reimburse them if they are unable to collect. Most factors
can provide this insurance at a cost of between 1 and 1.5 percent;
some require you to buy this cover from them, others will allow
you to obtain it elsewhere.
Factors providing finance on a ‘non-recourse’ basis
are usually fairly picky about the type of clients they will accept.
If your business comes into one of their high-risk categories they
may only offer a smaller initial advance against your invoices.
Factors will accept export sales ledgers as well as domestic ones,
and this can iron out many of the difficulties which a small business
would otherwise have with collecting money from a variety of foreign
countries, where the culture of payment can be very different to
that of the UK. And although most foreign businesses these days
have someone on the sales or purchasing side who has good English
skills, it is quite likely that their accounting staff may not.
Factors who specialise in export finance have their own staff who
can speak all the relevant languages and, if necessary, who know
how to chase reluctant payers; many actually have an associate with
an office in the debtors’ country.
In general, factors and invoice discounters like you to have a
big spread of customers. Some set a minimum of six, but there are
some that will fund single debtor sales ledgers at a lower advance
rate. If you are expecting a big order, which will put a high percentage
of your sales ledger debt with one customer, your factor will expect
you to give advance warning so they can ensure that the customer
is credit-worthy and provide guidance on the level of funding you
can expect on that invoice.