Factoring is a great way to borrow money for your business while keeping control of costs and managing your cashflow. These days you can also decide to hand over just a few big invoices to a factoring company. This is called single invoice discounting. It's usually expensive because there is much more risk involved for the factoring company. They rather want to look after all your invoices.

If you consider to use factoring for your cashflow, use these 6 tips from my invoice finance colleague David Summers:

1. Administration Fee
This charge is made based on your entire turnover and is usually a percentage charge on the gross value of your invoices.

2. Minimum Service Fee
This is not charged in addition to the administration fee, but if your actual turnover is below what you expected, a top up charge is made at the end of the relevant period. This is typically quoted annually, quarterly or monthly. 

Remember that if you go with a monthly charge, it may seem like a smaller amount, but in practice you could pay more if your turnover is “lumpy” or if your quote is based on a yearly forecast and the business turns over less in the early days.

3. Setup Fee (or Legal Document Charge)
The Invoice Finance company incurs its greatest cost at the inception of a facility and tries to recover some of this cost on day one.  Often providers who don’t insist on a minimum contract charge a higher set up fee to protect against early leavers.

4. Minimum Contracts
The standard in the industry is for an initial term of 12 months, with a lesser period thereafter. Factoring companies make very little profit from facilities lasting less than twelve months and most would say, they need two years to make any profit at all.
You need to source facilities carefully to avoid a bad fit, for your business.  Money saved initially may cost your company dear, if you do not get the service or funding you need.  It is wise to take advice, from an independent source, which has a broad experience of factoring and discounting.

5. Refactoring Charge
Not all providers charge this. In addition to the initial charges of processing and chasing your invoice, some lenders make an extra charge, where your customers get very late in payment.  This partially reflects the additional effort in preparation of legal action, which may be reasonable. However by this stage, costs may be disproportionate to the benefit.

6. Funding Limits
Some factors will set a limit on the amount which you can draw on the facility.  In practice, this can usually be lifted, without too much trouble.  However the limit can be restrictive if your business grows rapidly.  You should be sure you understand this and give yourself plenty of time to get this lifted before it becomes an issue.  Discuss this before you commence with your provider, to find out what notice will be necessary for them to increase the limit.