Factoring, Business Factoring, Commercial Factoring

Factoring, Business Factoring, Commercial Factoring

Most small businesses suffer problems with cashflow.  It goes with the territory.   It is written there, in big letters, when you sign in your own blood on the dotted line at the bottom of this Faustian pact to say that you want to run your own business: you will have cashflow problems.

In a recent survey of SMEs, managing cashflow was listed as the single biggest problem for 1 in 10 companies.  This is especially prevalent when smaller companies are suppliers to much larger ones.

When big organisations are late paying, these smaller companies have no safety net, which causes them cashflow problems, this has a knock on effect on their supplies.

Such financial constraints have limited many companies ability to expand.  They could quite easily go after the big accounts, which are the ones needed to grow, but they ask for credit, which they can't give them.

This can be extremely frustrating not being able to expand and push a great product and brand name to a national market.

But there are ways to ease such cashflow problems.  One of the best methods is factoring, which allows a company to raise finance against its debtor book.

With a traditional overdraft, a company might have to borrow money while it waits for the buyer to pay.  But with factoring, a company receives 85 per cent of the debt from the factor as soon as the invoice is raised.  The remaining 15 per cent comes through, less the factor's charges, when the buyer pays.

This process accelerates the trade cycle and offers more certainty.  Companies know they will be paid immediately and they can use this cash to either invest in their business or pay off their own creditors early, making them eligible for early payment discounts.

What Is Factoring

Factoring is an adaptable form of finance, which advances money to a business at the point of issuing new invoices.

Factoring involves full ledger management, which will leave you with more time to focus on your core business operations.  Factoring products can be tailored to a wide range of business types, however offers a significant benefit to the following businesses:

• Limited companies, Sole traders and Partnerships
• Companies with rapid growth models
• Companies who are experiencing financial difficulties
• Companies with seasonal sales cycles, affecting cash flow

Factoring offers a range of Benefits:

• Immediately frees up cash by releasing up to 90% of the money tied up in unpaid invoices
• Improves cash flow allowing investment
• Flexible credit management is built into the agreement with statements and reminder notices issued to reduce the administration burden for your business
• More Funding - Allows borrowing beyond the levels of normal unsecured overdrafts, usually for a much lower borrowing rate
• Flexible Limits - Funding grows inline with your turnover, the more you invoice the more funding available

Why Factor?

• Factoring is a flexible form of finance, which advances money to a business as and when it issues new invoices.  Factoring can bridge the gap between raising an invoice and getting that invoice paid.  Factoring provides the cash flow necessary for working capital and growth.
• There are two major advantages of factoring over overdrafts or other forms of personal or business loans, these are:
  1. Factoring is flexible in that the amount you can borrow grows directly with your sales.  This is essential to enable companies to fund their growth, since you must usually pay your suppliers before you receive payments from your customers.
  2. No other assets are needed to secure this funding.

What Can Factoring Do For Your Business?

Factoring companies also collect debt on behalf of their clients.  This allows businesses more time to concentrate on expansion, product development and sales rather than chasing late payers.  And because factoring companies have access to far more credit-reference information, they can give advice on which customers might represent a poor credit risk.  This reduces the risk of bad debts and ensures a company does not waste time building relationships with financially unsound customers.

Factoring companies usually charge a percentage of the amount of funding provided and a turnover charge on the debt collection.

For an extra fee, most factoring companies also offer credit protection insurance.  This means that if a debtor fails to pay after an allotted time the factoring company covers the invoice.  Almost 90 per cent of companies that use factoring also buy credit protection cover.

There are now many small companies using factoring to their advantage.

When they start, their customer base may expand quickly, and they soon run into cashflow problems.  Customer's maybe late paying and their suppliers will not give them more credit.  They find their banks won't lend them any more money.  Thus, despite being a great business on paper, they are unable to trade.

Then they start factoring, which provides them with the cash they need to finance the trade cycle.

The system is great because they just invoice their customers and then forget about it.  It means they save a wage in the office because they don't need someone to chase payments.  The scheme also allows them to pay their creditors on time, which means they get preferential treatment and can negotiate discounts.

One additional benefit of factoring is that you are only ever spending within the parameters of the cash you have generated, which helps keep your finances in great shape.

Although factoring works for some companies it is not suitable or available to all businesses.

On the whole factoring is not worthwhile or profitable for companies with sales of less than £100,000 a year, however this is not a rule cast in stone.

The industry also does not offer factoring to contractual businesses where it is not clear the point at which the product or service is finally delivered.  For example, factoring would not be offered to construction companies because there might be an ongoing service contract or even disputes about faulty work that might need repairing before a bill is paid in full.

For more information on factoring visit the Factors and Discounters Association website.  The Association is the representative body of the factoring industry and its website contains the contact details of all registered factoring companies in the UK.