Sources of Finance - Debt Factoring

What is long term finance?

Finances the whole business over many years

What is medium term finance?

Finances major projects or assets with a long life

What short term finance?

Finances day-to-day trading of the business

What are the examples of long term finance?

• Share capital

• Retained profits

• Venture capital

• Mortgages

• Long-term bank loans

What are the examples of medium term finance?

• Bank loans

• Leasing

• Hire purchase

• Government grants

What are the examples of short term finance?

• Bank Overdraft

• Trade creditors

• Factoring

What is factoring?

Factoring is a way a business can raise cash by selling its sales invoices to a third party (a factoring company) at a discount

What is an example of factoring?

A business makes sales of £100,000 per month. Its customers are given 60 days to pay their invoices. On average, the business has around £200,000 owed to it by customers at any one time. The business needs to raise cash to improve its liquidity

What are two options that businesses can use for invoices?

1. Wait for customers to pay their invoices (e.g 60 days)

2. Sell these invoices to a factoring company for cash (at a discount)

   • E.g invoices worth £200,000 are sold to the factoring company

     • The business gets 90% in cash= £180,000

     • The factoring company collects and keeps the £200,000

What are the benefits of factoring?

• Receivables (amounts owed by customers) are turned into cash quickly

• Businesses can focus on selling rather than collecting debts

What are the drawbacks of factoring?

• Quite a high cost (discount offered to the factoring company)

• Customers may feel their relationship with the business has changed