Figure 1 outlines the process of debt factoring for Flash Trucks, a fictional delivery firm. The figure shows a timeline from January to March. There are five steps along the time line. When each step is clicked, the following description is revealed.
Step 1, January. Flash Trucks delivers the machinery to the customer: Flash Trucks is a delivery company based in the UK. It has to deliver pieces of heavy machinery to a customer in January and has agreed to charge £10,000 for this service
Step 2, January. Agree delayed payment with customer: The customer agrees with Flash Trucks on a payment for the delivery delayed to the following 31st of March
Step 3, January. Factoring company buys rights to collect the receivables: The ‘factor’ (a factoring company) buys the right to collect the money Flash Trucks is owed. The factor legally owns the receivables and obtains all of the rights associated with them. Almost immediately, the factor pays to Flash Trucks a certain percentage of the total value of the product sold (typically no more than 90%). Let’s assume in this case the factory pays to Fast Truck 70% of the total value (i.e. 70% of £10,000= £7000).
Step 4, early March. Payment due from customer: When the payment is due, the customer will pay the factor directly, and Flash Trucks receives the remaining share of the value of the service provided (e.g. the remaining 30% of £10,000, i.e. £3000).
Step 5, end of March. Fee due to factoring company: Finally, Flash Trucks pays a fee to the factoring company for the service provided (typically around 3% of the value of the sale, i.e. £300 in this example). Factoring avoids the potential issues businesses can experience due to delayed payments from customers.