Factoring firms can offer several levels of service. The premier service usually involves taking over the complete management of the business’ accounts receivable, including administration, confirmation, and collection of invoices, regular reports and monthly ageing reports on all accounts processed.
This is usually coupled with a seamless, confidential service, where the customer of the business is unaware of the relationship between the business and the factor and all communication between the factor and the customer is branded as the business. In other cases, the factor may only take over aspects of the accounts receivable function.
The level of service provided by the factor is often related to the value of the debtor’s book (e.g., creditworthiness of the business’s customer).
While it may appear complicated at first, outsourcing accounts receivable can significantly reduce costs. More importantly, it is particularly useful for businesses that are growing or moving in a different direction with a view to improving profitability. A growing business can quickly outgrow an overdraft secured by fixed assets, yet it may not be able to obtain finance on an unsecured basis.
A business may also need the flexibility to cover sudden increases in order levels. Factoring provides funding in line with sales growth.
This form of finance can also be useful for start-up businesses that need to pump cash back into their business to build their inventory, but have difficulty obtaining overdraft or working capital facilities due to a lack of trading history.
Service, manufacturing and wholesale businesses are often suited to this type of finance.
Businesses that mainly sell on cash terms to the general public may find credit cards or overdrafts more cost effective. Those with complex products or terms of sale such as trial and return clauses or those in the construction industry, where customers are invoiced in stages, are also less suited to factoring due to the complexity of the supplier/customer relationship.