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Invoice Factoring


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I'm become a little frustrated by the amount of effort it is taking us to get payment out of some customers. We don't suffer from "bad debt", as such, the problem is more with certain customers taking their time with payment, treasurers being crap about getting round to writing cheques, etc. etc.


I know that one way of attacking the problem is tightening up our procedures for getting payment when equipment goes out, and we're working on that.


However, I'm also attracted to the idea of factoring our invoices. It would clear up cashflow significantly, and outsourcing the collection process appeals. Chasing overdue payments is the kind of task that we struggle to get around to when we are busy, and I figure it will be better for the ongoing customer relationship if our staff aren't having to act as balliffs.


I've had a quick read around and talked to a couple of factoring companies. From those conversations, it appears that our industry is a relative unknown to them - they were struggling to understand how we operate and a bit bewildered by our range of clients. I'm curious if anyone else out there is using factoring, and if there are factoring firms who are more in tune with the needs our industry. (In the same way that insurance brokers like Doodson have a bit more of a grasp of what we do and price accordingly) Anyone got any recommendations?

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We have used invoice finance for 4 years now. We are currently with RBS.


I can say it has helped us out a great deal over that time however it is not the ultimate solution.


Our main issues have been:


1) Them chasing our clients - Previous companies (not RBS I must add) have been quite aggressive whih customers.

2) Account credit limits - these vary wildly from supplier to supplier and it is essential to get limits on your clients before you sign any deals with a factorer.

3) Pre production - is very difficult to finance

4) Paperwork MUST be perfect - we are randomly audited by RBS on our delivery notes etc - if its not upto scratch you will be in BIG trouble

5) Beware of concentration - Most factorers set a 50% concentration limit - i.e. no more than 50% of the total debt to the company can be with one client. If you go over (which is easily done with one big invoice) you will lose a lot of available funding until the numbers fall below 50%

6) Check charges - they are/can be significant but often outweigh the cost of Overdrafts/Charges/Solicitors Letters.

7) Even with Invoice Finance we have a debt turn of circa 50 days.

8) Negotiate prepayment percentage - we have negotiated ours down but example figures should be 80-85% - i.e. you get 85% of the invoice value instantly and the remainder minus charges once the customer pays.

9) Accounting software - check compatibility - we use Sage but not all other packages work well with the website from the factorer.


Hope that helps a bit - I cant recommend RBS enough but I know there are other companies out there (we have used one other bank and they were awful).


Messgae me if you need any more info.



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Thanks, Jon, for an incredibly helpful and comprehensive reply - just the kind of info I was needing.


My hunch from what you've said is that we'd shift from spending time chasing clients to spending time making sure paperwork etc. is perfect for the factors. I'll have a wee chat with RBS nonetheless.

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Its not that bad. But once youve got a system in place you must stick to it.


We manage Ok and theres not many of us!


Im not being melodramatic when I say I'm doubtful we would have survived too well without it.


If you want an RBS contact let me know I have the guys numbers here.



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Read the small print of any offer and then read it again.


Some companies insist you insure against customers defaulting. Before you can accept an order you have to run a credit check and if it comes back negative you cannot sell to them on credit, even if you decide to do so at your own risk. Basically, one you start factoring/invoice discounting EVERY sale, other than for cash up front, must go through the system.


If you have any important customers, even if you know they are good for the money, if the credit company decides they are a bad risk you will not be able to deal with them other than on a cash basis.

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Good point. when I started out in business on my own at a start-up course some chap asked a question which implied he thought you could simply factor the bad payers. He was soon disabused. However the guy doing the course - who was in business himself - reckoned on balance if you could manage it it was better to keep credit control in-house. Easier said than done of course but if Jon's experience is that, even with factoring, they're still on fifty days average it does make you think. Problem is that most of us are so interested in what we do we leave the paperwork on the back-burner. My lecturer was clear that once you were in business chasing payment had to be the number two or three priority and it was essential to keep it to the fore. It was, he stressed, why you were in business after all. I hated it, but when a regular client drifted to nearly seventy days I had to steel myself for unpleasant phone conversations.
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If you do go down the factoring route, stay clear of Bibby Factors - we used them some years ago and they were useless.


Also, before you sign on the dotted line, make sure you have all the costs under control. Most factoring companies will charge you a minimum amount per month regardless of how many invoices you factor.


In addition, many factoring companies will tie you in to a notice period of 6 - 12 months, which can make it a bugger to buy your way out of factoring.


On the whole, whilst factoring is good for cash flow initially, it can work out quite expensive.


If you can, keep out of factoring, and structure your pricing so that you can give incentives to customers for paying up-front, settling early etc.

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I have spoken to people who dislike dealing with companies that use factoring - possibly as it has been insisted on (in the past?) by banks advising, or rescuing, companies close to the edge.


In my own experience I have only ever dealt with a couple of companies using this method to 'improve' cash flow - and had to send my payment cheques to the bank directly. Funnily enough - these companies aren't around any more.......


Again if you ask people what they most dislike about the 'cost of doing business' - bank charges will come high on the list. So surely factoring, however well it might improve your cash flow initially, must increase your costs and charges?


My own simple philosophy is to pay invoices promptly, often immediately on receipt. I then find that the companies with whom I trade are very happy to do that rush job, or go above and beyond - as they know they will be paid quickly.


At the other extreme - slow payers probably don't get this level of attention - and probably end up paying more anyway!

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I've never quite got Factoring, I'm sure it has its place and works for some companies but I've never been a fan. If your company is profitable, then look to build up a cash safety net for when people are late payers. If your business isn't profitable and you don't have cash to leave in the bank..then thats another question. I've also noticed that they can make mistakes, twice we have had really stern letters from one of our suppliers factoring companies because they assigned our payment to a different account. It scared the life out of me to think one of my valued clients (mostly major corporates) could get a letter threatening debt collectors for being 14 days late. The problem is they do not see a distinction between the new dodgy client who is trying it on and deserves a good kicking and the wonderful client who has worked with you for years and you are happy to give a little breathing space.


I've known of techs getting back to the warehouse and being dispatched back to site because the client hasn't signed the right bit of paperwork..just seems a little more trouble than its worth..(this was when I was working for a company paying over 12k a month in bank charges........gone bust now..funnily enough)


We use an accountant/book-keeping company, that charges a pretty reasonable fee to look after all our invoicing, reports, payments, banking, payroll etc and they are happy to chase clients, send statements do pro-formers as we request, allowing us to decide how individual clients are handled without having to do the leg work. As I said we also keep a healthy balance in the bank, so we are not always chasing our tails. I know some people will say that having cash in the bank is not the best use of it...but we call it our "sleeping well at night" money and knowing we can pay all our bills this month is better than having a new shiny bit of kit on the shelf.


Edit: Just read Mixermends post..all I can say is, Spot on.

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factors are getting used more commonly generally throughout business now, I wouldn't say they're related to 'sinking ships'


your accountant should be able to help you work out if its a good option for you, as you need to work out how much you're spending in the current situation and how much in the factoring situ, and decide if the time you don't spend chasing invoices has a 'cost' to you (if its time you'd otherwise spend twiddling your thumbs in the office then you wouldn't save that). Another thing to consider is that the factor will give you better ease of planning for cash - if you KNOW you're going to get that money after 50 days you can plan better than if you MIGHT get it.


as for cash in the bank, its a balancing act: too much cash - badly invested asset, too little cash - risk of not being able to pay your bills....

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I think zoning has a fair point - it truly isn't right for everyone. For us it has not been that expensive - it has improved cash flow and we have an exit strategy designed. It is though an important consideration and one that should be made with your accountants input.


With regard to factoring companies being heavy with customers - you can (like us) opt to do your own calling - we decided a while ago that we should talk to our clients not some 3rd party.


Its easy to suggest that profitable companies should aim to be very cash rich. I don't think thats always realistic. Profitability and cash-flow are two separate subjects and one does not necessarily provide the other.


Also we have made the decision to invest in our business and its inventory rather than sitting on cash. Thats our decision - works for us and maybe not others.

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I must admit I'm not used to this kind of factoring - I've seen it used frequently when there is a need to raise capital quickly by selling on debts - but not poor payers, regular good payers. It's also useful for hire companies that can use longer term contracts to raise funds because the funding stream is secure. factoring invoices in this way seems a last step process, and could easily damage your reputation. Factoring is different from debt recovery - and normally used for a specific purpose, not recovery?
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I'm pleased that my question has kicked off such a detailed discussion.


To answer a few of the points made:


We're not in any kind of financial difficulty, although our cashflow does get squeezed from time to time. My main frustration is the time and effort that it is taking us to chase up money. As some have mentioned, it is hard to put a cash cost against this time. But it is certainly an annoying distraction. Getting money in the door is a key business function, but having skilled staff spending time making collection calls instead of landing work and serving customers is rather frustrating.


The idea of factoring was put into my mind when I noticed that one of our suppliers was factoring their invoices. (Incidentally, I noticed this when I saw their invoice, their factors weren't having to chase us!) They are a pretty well known pro audio distributor, their brands will be familiar to many on the forum. I had a chat with our sales contact there, and they have apparently factored everything since day one, and were very positive about it. I think this is the only time we have come across a supplier using factoring, and I don't think it would lower my opinion of them, but on the other hand that would perhaps have changed if I had previously dealt with firms that factored as a last resort and then disappeared into oblivion.


At the moment, we get the majority of our money through in less time than the 50 days that Jon seems to be experiencing with his factors. It is generally a smaller minority of customers that are slower to pay. I'm beginning to think that a combination of better procedures and more energetic debt collection (perhaps resorting to a collection agency quicker for the real laggards) would be a better overall solution than factoring everything.

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Initially I thought factoring as something that was used by companies that we on the brink. But my attitude has changed over time, and as the business has grown to where there are times where it would be great to have the cash more swiftly.


We considered it to briefly, then once we'd discussed it with the RBS Factoring people (as we bank with NatWest), it didn't seem to be suited to our industry. It was initially brought about by one particular client that we felt there were good reasons to trade with, but had let us down on a particular job, so we were looking to factor this one particular client, which they wouldn't consider. They initially struggled to cope with the idea that we would sell to both B2B and B2C, and on differing terms for differing clients - that seemed to cause a problem. The threshold that they said they would consider factoring from was around the £160k mark IIRC. They also struggled with the concept of us renting kit out rather than selling it. There are probably companies better suited to our industry that we haven't spoken too though.


That said we have a part time Finance Manager who basically looks after all that side of the business, with me and the other director taking regular management accounts to keep and eye on it all. I figure that a chunk of what we would have given away in factoring fees goes to cover her salary. She keeps on top of things and we generally don't seem to be suffering with too much late payment. One or two 'thorns in the side' that we've reduced discount and payments terms due to repeated late payment, but otherwise generally ok.

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