Background. Debt factoring involves selling regular business invoices to a third party. In return they will process the invoices and allow you to draw loans against the money owed to your business.Factoring as a good way to boost company's cashflow or release money for expansion or other purposes. However, factoring is not suitable for businesses which mainly sell direct to the public, such as retail shops.

Factoring and invoice discounting is now widely used and indeed accepted as a viable alternative to the traditional overdraft facility. Some 30,000 businesses across the UK use factoring and invoice discounting, with some £8 billion currently being advanced in the market.

Use. Factoring is commonly used by companies to improve cashflow but can also be used to reduce administration overheads. Companies that supply this service are called factors or debt factoring companies. Invoice discounting is an alternative way of drawing money against invoices. However the business retains control over the administration of the sales ledger. As well as providing finance which is probably the main attraction, it offers valuable support services and credit insurance.

How High Can Advances Be? The factor will typically agree to advance up to 80 to 85 per cent of approved invoices. Payment is usually made within 24 hours.

Charges. Typical charges range from 1.5 per cent over base rate to 3 per cent over base rate. Interest is calculated on a daily basis. These rates are roughly equivalent to bank overdraft rates and can even be better. In addition there is normally an administration fee depending on invoice turnover, ranging between the 0.2 per cent of turnover to 1.5 per cent of turnover.

Considerations. Factoring is a complex, long-term agreement that could have a major effect on your business' development. It is advisable to consult your solicitor on the legal and financial implications of factoring.