Debt factoring

Debt factoring is a means for a business to increase its cash flow without loaning the money from a financial institution.

Definition of debt factoring

The definition of debt factoring is the assignment of debts for consideration. The assignor, being the business which is owned the debt assigns all or part of the debt over to the debt factor for consideration, which is generally anything from 80% to 95% of the value of the debt. The debtor is then liable to the debt factor as opposed to the business (the assignor).

Advantages disadvantages

The main advantage of debt factoring and indeed the reason businesses enter into debt factoring agreements, is the fact that the business can be paid for the goods or services provided within 48 hours instead of waiting up to 90 days for payment by the debtor. Invoice discount factoring is when a business sells its invoices to a factor at a discount and thereby assigns the debt due pursuant to the invoice to the factor.



The difference between the value of the invoice and the price paid by the debtor is often called an administration fee. This means the businesses cash flow is much greater and it can use the cash flow generated by debt factoring to expand its business and generate more profit. Another advantage is that debt factors also offer services which banks do not as part of the debt factoring agreement. Further because debt factoring involves the sale of assets as opposed to a loan, usually no security is required. The disadvantages in comparison with a normal bank loan is that the costs are higher and some debtors who are unfamiliar with the process may be uncomfortable with paying the debt factor.

Debt factoring services

As part of the invoice discount factoring agreement, often debt factoring services are provided by the debt factor for instance sales accounting services and debt collection services. The debt factor will often provide up to date reports as to who has paid their invoice and who has not. If the debt factor has offered debt collection services as part of the debt factoring services included in the invoice discount factoring agreement, the debt factor will chase up late payments, taking this responsibility from the business.