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What Is Debt Factoring?
In debt factoring, a business sells its unpaid invoices (also known as account receivables) to a third party at a discount to unlock instant cash flow. It is another name for invoice factoring or account receivables factoring.
The debt factoring company pays a significant amount (usually 75-90%) of the total account receivable value upfront. The remaining amount is cleared after all the invoices have been paid. Debt factoring is a suitable option for businesses that want to improve their cash flows by selling their assets (account receivables).
How Does Debt Factoring Work?
Debt factoring works in the 3 easy steps:
Sell to your customers: Sell your goods and services to customers and generate invoices.
Sell your invoices: Sell your invoices (account receivables) to a factoring company that pays you up to 90% of the invoice value up-front. The remaining amount is released (after fee deduction) when the factoring company receives full invoice payment from customers.
Use money to fuel growth: Use the money to finance your business growth. Fix cash flow issues, buy new equipment, expand operations, or invest in human capital.
Other types of factoring:
Spot factoring (also called single invoice factoring) enables a business to sell individual invoices selectively. This type of factoring allows businesses to choose which invoices to factor based on their cash flow needs.
Reverse factoring, also known as supply chain financing, is a three-way agreement between a supplier, a buyer, and the factoring company. The factoring company pays the supplier on behalf of the buyer, offering quick payments at a discounted rate.
In recourse factoring, the business that sells its invoices to the factoring company remains liable if the customer fails to pay the invoice. If the customer defaults, the business must buy back the invoice or replace it with another. The risk of non-payment remains with the business.
With non-recourse factoring, the factor assumes the risk of non-payment by the customer. If the customer fails to pay due to insolvency or credit issues, the factor absorbs the loss, and the business is not responsible for repayment.
This term is used interchangeably with invoice factoring. It involves the business selling its unpaid invoices to a third party (factoring company) at a discounted rate to receive early payments. Upon receiving the invoices, the factoring company releases the bulk of payments (up to 90% of the collective invoice value). The rest is paid (after fee deduction) when the payment is collected in full from the end customers.
Sectors that Debt Factoring covers
Retail
Mechanics
Restaurants
Bars & Clubs
Leisure Clubs
Plus Many More
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What can you do with debt factoring?
Invest in stock, HR, & equipment
Access capital for essential business needs.
Focus on High-Value Operations
Free up time by outsourcing collections.
Improve Cash Flow
Convert unpaid invoices into immediate funds.
Fuel Growth
Use funds to expand, and invest in stock, HR, or equipment.
Debt Factoring FAQs
Debt factoring is also known as account receivables factoring or invoice factoring. It involves a business selling its accounts receivable to a third party at a discount. The debt factoring company buys these invoices at a discounted rate, providing immediate cash to the business.
When it comes to debt factoring, ComparedBusiness is here to help you save time and money. You can easily submit your business requirements through ComparedBusiness in under 2 minutes.
You will get quotes from top Debt Factoring companies delivered to your email. You can then compare and choose the most suitable option as per your business needs.
Debt factoring can be a suitable option for small businesses with a monthly turnover of over £4,000. It is one of the most reliable ways to quickly inject cash into the business without taking a traditional bank loan.