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Factoring works as follows: The factor fully manages your sales
ledger and provides you with credit control and collection services
of all your outstanding debts. The invoices you issue upon a sale are
sent to the factor who typically advances up to 80 to 90% of the invoice
amount to you. The balance, less charges, is paid when the customer
makes payment directly to the factor. The service is disclosed to your
customer who typically receives a letter from the factor, or attached
note to your invoice, containing payment instructions to the factor.
Funds are typically released to you within 24 hours of issuing the invoice. There are typically two costs involved: a service charge expressed as a percentage of sales factored and an interest charge for the cash advances. The service charge, covering sales ledger management, collections services and, if you wish, bad debt protection can range between 0.60% and 3.0% of turnover. The main considerations in determining the service charge are your annual turnover, number of invoices and number of customers. The interest charges calculated on the daily usage of funds is typically comparable to normal secured bank overdraft rates. When the risk of bad debts remains with you the service is referred to as recourse factoring. Non-recourse factoring protects you against customers who fail to pay. The factor typically covers this risk by taking out credit insurance. The cost of the credit insurance is passed on to you and depends on the risk profile of your customers and the amount you factor, typically between 0.3% and 0.7% of turnover. You also agree on coverage limits with the factor, normally 80-95% of the factored amount. Many factoring companies provide Internet access to your account, allowing you to constantly monitor your sales ledger and individual customer details. Paper can be eliminated by electronic transfer of your invoices from your PC to the factor. Getting the proper factoring company which will work with you as a "partner" instead of accompany is vital to you getting the most out of factoring for your company. |
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