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• 29 May

  Can Factoring Be Free?

  

  Can factoring be free?

  Trade Credit And The Credit Gap

  Most people that sell to other business have to offer some form of trade credit terms. This is typically 30 days in the UK, but it does vary between sectors. This means that if you do a job or provide a product, you then raise your invoice, and the buyer has 30 days to pay for the product or service.

  Missing Out On Supplier Discounts

  This can create a cash flow problem as you often have to pay for raw materials, purchase products or pay staff and expenses, before you get paid by your customers. We call that the "credit gap". When you don't have access to cash you are in a weaker position with your own suppliers. For example, if you can pay immediately, without the need to take a credit period, some suppliers will offer you a discount on the price that you pay for supplies. Many suppliers also offer discounts for annual payments, rather than monthly payments.

  How Factoring Bridges The Credit Gap

  Debt factoring is a financial service for companies whereby you don't have to wait for your customers to pay your sales invoices, it bridges that credit gap. You receive a prepayment against the majority of the value of your invoices (the balance is passed to you when they pay, less charges).

  An Alternative To Employing Credit Controllers

  However, the factoring company also provides a credit control service. The quality of this service will vary between providers. It can range from a fully comprehensive service, that means you don't need to have credit controllers, through to a basic service whereby only the top few customers are chased. Assuming you pick the right provider, you will get a fully comprehensive invoice chasing service, so you can leave that to the professionals. The interesting part is that you could also potentially save the cost of a credit controller's salary (£17K to £29K per annum according to Payscale.com) and the related costs, which may include:

  • Employers national insurance payments.
  • Employers pension contributions.
  • The cost of other benefits.
  • Phone call costs.
  • Software licences.
  • Premises & equipment costs.

  How Much Could You Save?

  We built a model (it's a bit old now so you may want to update the values) that allows you to plug in the figures for your organisation to see what the net benefits (or costs) of factoring would be: Factoring Cost Savings.

  Why not get an instant quote for factoring and put that cost into the model to see how much you could save, and find out if you could you even offset all the costs of factoring so that it becomes free.

  By Glenn Blackman