cmcc

Factoring is where you effectively sell overall control of your debtors ledger to someone else, for example a bank such as HSBC. Every single sales invoice you raise, you send to them on a regular basis and they upfront (loan) you up to 80-90% of the invoice value, available immediately rather than you having to wait weeks or months for the debtor to pay. They collect the whole amount on your behalf with the remaining 10-20% passed to once the debt has been paid within normal time frames. They also chase the debts for you (and may harrass your customers) since you've effectively handed over control of your debtors ledger lock, stock and barrel. You are also landed with three charges. They charge a percentage of each invoice value, say 2%. They also charge a lending fee for the drawdown (was up to 13% when I did it) plus a transfer charge of up to £10 daily if you need immediate liquidity (as is often the case).

Invoice discounting is similar but you retain control of the chasing of the debts. This is slightly cheaper than full on factoring but you have to demonstrate to the factorer that you have an effective credit collection system before they'll lend to you.

Both are often forced onto small, cash weak companies by banks who may be concerned about the company's overdraft. It's a quick fix in the short term due to the huge cash injection at the beginning but long term is often a death knell to those who've adopted it as the banks make fortunes once their hefty charges soon rack up. It's also open to abuse as pre-invoicing - strictly against the rules - often becomes a temptation, especially when cashflow hits critical levels. This is then offset by credit notes if/when the banks chase the debt only to realise it's been "accidentally" invoiced and a strange kind of stand-off between factorer-factored may ensue.

Many (now including myself) see it as unethical bank exploitation and something to be avoided at all costs.