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How debt factoring works

Debt factoring provides an alternative to a bank overdraft for cash flow purposes. Up to 85 % of outstanding debtors are releases as you raise an invoice. An overdraft will be restricted in size depending on the amount of aavailable security aavailable. A factoring facility will grow with the business and will provide a available source of working capital as a business grows. In addition a certain amount of credit control is provided in the process. A minimum charge for running a factoring facility is circa £2-300 per month. For a small business this may seem allot but compared with the cost of employing a credit controller we think it provides pretty good value for money. The minimum turnover to make it cost effective would be in the region of £80k per annum.

There are two charges for a debt factoring charge. First the interest rate for borrowing money is comparable to a bank overdraft. You will be charged at 2% over base or libor depending on the finance company. Beware some finance companies charge a minimum base rate and as such it is prudent to check the small print to ensure you are comparing apples with apples. The second charge is the service fee for providing credit control and debt collection. Although a bank based factoring company may offer a very cheap service charge they do not always provide the best service. Certain banks will only chase by telephone your top 3 customers leaving the rest to be chased by letter. Therefore debt turn is not always the best. A specialist factoring company will telephone all your customers and as a result get the money in through the door quicker. This aspect of the factoring service is very much about adding value to your business and as such the cheapest is not always the best.

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