What Is Debt Factoring? (2024)

Many traditional business finance products require substantial time to come to an arrangement: extensive paperwork, long-winded stock valuations and other mitigating factors which could deter the idea of accessing additional funding.

With debt factoring however, a facility can be approved in as little as a working week provided that your business has a stable annual turnover of at least £50,000 and satisfies any checks which the funder deems necessary to assess its financial stability. If your firm needs urgent financial support for daily operations or fulfilling peak season demand, then this service could thus prove invaluable.

Debt factoring, in much the same vein as some other cash flow support facilities, isn’t necessarily suited to every UK business. For example, if your firm’s sales ledger relies on a small number of core customers of which are less reliant on 30-90 day credit terms, then your chances of securing a debt factoring arrangement are slimmer.

Additionally, the size of your current customer base can affect the funding available through debt factoring due to concentration limits imposed by certain arrangements, meaning that businesses with smaller client rosters may want to consider alternative facilities which don’t rely on this criterion such as an unsecured business loan.

Your desired funder(s) will prefer some assurances that the arrangement is low in risk and the client’s customers tend to make their payments accordingly. As such, a different finance solution – e.g. asset finance, a service focused more so on your current property/equipment holdings – may prove more desirable for your business if the reliability of your customer base is still being established.

We always therefore advise that companies curious as to what factoring opportunities are available to them first seek independent guidance to ascertain whether their customer base’s credit ratings will likely qualify them for the service.

More relationship management consideration is needed to account for debt factoring in the form of invoice factoring. The more that invoice finance has grown in prominence in recent years, the less of an issue that arrangements involving outsourced debt chasing has become for most industry players, but for any businesses relying on only a handful of clients, ensuring that these precious relationships aren’t jeopardised by the introduction of a funder into the fray cannot be overstated.

Firms concerned about these matters might consequently need to consider a confidential invoice finance arrangement, wherein the company and their funder will collaborate without ever needing to notify the customer base of their financial agreement – thereby achieving the best of both worlds.