What are peoples views on Invoice Finance

[ajmartinco]

I would be interested in your views on the pros and cons of Invoice Finance.
I am obviously biased as amongst other things I provide some consultancy on the subject.
However I do believe it is a very underrated form of finance.

I will be interested in your views.

Thankyou in advance

Andrew

Andrew Martin (ajmartinco) on Twitter

[NikkiPilkington]

Do you mean factoring?

I'm in 2 minds. I always refused to look at invoice factoring, as I thought it made me look small and as if I couldn't afford to run my business.

I understand the concept of it, and loked into it quite extensively about 8 years ago, but decided not to do it, as every time I got an invoice from a supplier who had gone through a factoring company it made me wonder if they were as successful as they claimed.

(The fact that they went bust didn't help...)

I am aware that a lot of bigger companies use invoice factoring though, so this is just my personal opinion.

[matt.chatterley]

I agree that the impression given by factoring could be potentially damaging. Also I can't really see why you wouldn't do you rown invoices in this situationj - surely it saves you money, which in these conditions is valuable (and it doesn't take too long - if it does, you need to reorganise).

I've never quite understood why large companies use factoring - although I would suppose that this is to avoid the overheads involved in maintaining a large accounts department - perhaps on a larger scale it works out more efficient?

[TS00]

Originally Posted by matt.chatterley

I've never quite understood why large companies use factoring - although I would suppose that this is to avoid the overheads involved in maintaining a large accounts department - perhaps on a larger scale it works out more efficient?

The primary purpose of factoring is not to reduce your administrative overhead (although it can), but to improve your cash flow. Instead of waiting 30 days (or perhaps 90 days, or even longer) for payment, you get paid as soon as you issue an invoice. This allows you to use the cash to buy more stock.

In essence it's a short term loan, on a rolling basis. I disagree about it making your company look small - some of our biggest suppliers factor their invoices. It really depends on your business model.

Having said all that, I think factoring is a tool of the devil, and would never touch it. It eats away at your margin like a remorseless hungry beast.

[matt.chatterley]

Originally Posted by TS00

Having said all that, I think factoring is a tool of the devil, and would never touch it. It eats away at your margin like a remorseless hungry beast.

Thanks for clarifying. And I love this sentence. Nice description.

[fundingportal]

The term 'factoring' became somewhat stigmatised in the last recession, largely because it was misapplied and companies used it as a last-ditch attempt to raise cash and, in many cases, ended up going inevitably bust. In the vast majority of cases the bankrupcy was in spite of, not because of the use of factoring.

More frequently used terms now are invoice finance, debtor finance or commercial finance; whilst there are lots of permutations, there are generally two key facets.

- Release of cash against book debt On a stable or growing debtor book, this can provide valuable liquidity to grow a business. As with any form of borrowing, its value is very much a factor of return on investment - ie how much money you can make on cash advanced. If ROI is not significantly greater than the factoring cost then it is probably not adviseable. (This, of course applies to any form of borrowing).

- Collection of book debts. Most companies are less good than they think at this and, as I have mentioned elsewhere, poor collection procedures can be the fast track to failure even for a profitable business. If running a credit control facility will involve recruiting people, the cost of factoring starts to look quite reasonable.

One customer applied a simple experiment when selecting a factoring company: they simply didn't pay any factoring company invoices and waited to see who chased soonest and most professionally. From this they selected a clear winner - but I'm not going to tell you which:-))

In short, if your business need funding to survive, then factoring MIGHT give the breathing space you need. If you need funding for sustained growth, it is worth considering closely.

Finally, a guide to asset finance - including factoring/IF can be downloaded from our website Business Funding Portal

Phew!

[seanstevens]

Factoring has a place and should never be totally overlooked.

It does have a stigma attached to it. When carrying out credit assessments I do look at what charges are attached to the company and if any factoring is mentioned it does give you a feeling that the company cannot manage their AR. However, over the years I have spoken to many companies about the reasons they started with it and have received many logical responses.

Some companies just do not have the capabilities to collect their own cash in a reasonable time and factoring is an easy way of ensuring some income from them in a timely fashion. Others, as has been mentioned earlier, just do not want large finance departments and chose between factoring and outsourcing.

In the past 15 years, I have always kept credit / collections in-house and have spared no expense to get it right, a good cash collector is worth their weight in gold. A bad one can kill your business.

Whatever you do, remember not everyone can collect cash and sometimes you need a specialist to do it. The larger the company the more times I hear "it's only cash collections, anyone can do it" - once you get a marketing, sales or other department team member to do a week in the cash department they soon change their minds!

[essex_courier]

Lots of couriers use factoring because many are 'owner-drivers' and they do not have the time to chase late payers etc and also it makes the cash flow easier when starting out.

When we expanded a few years back we looked into factoring but decided against it. Several companies whose delivery services we have contracted in use factoring companies and they were far bigger than us, so for us size/impression didn't play a part in using them or not.

[Paul Norman]

In some industries it is very workable. But be careful. I have been with a few clients recently for whom it has been a negative thing.

Do the arithmetic carefully. Understand the percentage holdback. If this is more than your margin, your cash flow is negative. Understand the clauses on clawback for unpaid debts. Remember you still carry all the risk here.

It can be successful. But it is not a cheap source of finance. And it is not a substitute for close cash management.

[fundingportal]

Paul

Useful points, which can be applied to any type of business funding in various formats.

What perplexes me is that for some reason an overdraft is considered to be a viable business tool, whilst factoring carries a 'business in ditress' signal. In reality, far more busineeses are crippled by withdrawal of banking facilities than by factoring agreement.

[1clickprint]

i dont see a problem with factoring. We use HSBC for our invoice financing and the fee's are comparable to the credit card processing fee's we have to pay for the customers who pay by credit card.

We have our own account manager who chases all of our debtors , issues letters to bad payers and raises limits for the good ones . We dont have to chase any payments at all now as money is either taken upfront by credit card or the customer is offered a account through our factoring company.

It has nothing to do with cash flow for us, it has two main benefits

1. i dont have to spend hours everyweek chasing up late payments and invoices, before we started using invoice factoring this was a job in itself.

2. it allows credit to be offered without the huge risks involved. If a client defaults then we have to stand the first £500.00, the other is stood by the factoring company hence lowering our risk.

Maybe our situation is a little different as when we first started the company it wasn't aimed at business to business, our corporate clients have come on later as the core business have grown after we moved from being a broker to a manufacturer. We still deal with our residential customers but they now equate to around 45% of the business rather than 100% of it 4 years ago

[jijwhite]

My experience has told me that it is there to help you with cashflow but can cost between 3-10% of an invoice which is a lot of margin to use. It can work well if you have a physical product to sell but if your service based (even with large contracts) then its unlikely you will get much joy.

I think it has its place and when you have suppliers on 45-60 odd days terms then it can be a useful tool

[Ian J]

I don't know what it is about the subject of factoring that generates so much twaddle on forums

Originally Posted by jijwhite

It can work well if you have a physical product to sell but if your service based (even with large contracts) then its unlikely you will get much joy.

You are actually quite wrong as the largest market sector who use factoring or invoice discounting are recruitment contractors who need to pay their contractors weekly or monthly bang on the nail but will be waiting for 30, 45 or 60 days for their customer to pay them.

I always refused to look at invoice factoring, as I thought it made me look small and as if I couldn't afford to run my business.

The last statistics published by the factors' trade association showed that there were 47,000 UK companies using factoring or invoice discounting. 18,600 of these had annual sales of less than £500,000 but nearly one half had annual sales in excess of £1m with 3,000 turning over in excess of £10m

The fact that they went bust didn't help...

Another old chestnut that regularly crops up is that factoring is obviously no good as "I had a supplier that factored and they went bust". Oddly enough I've never seen the opposite point of view put that "I had a supplier that went bust who didn't factor so obviously factoring is a good thing"

I've never quite understood why large companies use factoring - although I would suppose that this is to avoid the overheads involved in maintaining a large accounts department - perhaps on a larger scale it works out more efficient?

Size is really irrelevant in many cases and it doesn't have a great deal to do with overheads either. Banks aren't too keen on lending on overdraft and whilst factoring or invoice discounting may be more expensive than the notional overdraft the the bank manager won't give, it needs to be looked at with that perspective.

One customer applied a simple experiment when selecting a factoring company: they simply didn't pay any factoring company invoices and waited to see who chased soonest and most professionally. From this they selected a clear winner - but I'm not going to tell you which:-))

Good story but unfortunately the truth is a little different. A good factoring company will discuss credit control policies with it's client and there are many clients that don't want the factor to chase too quickly.

The larger the factoring company the more credit controllers will be employed. I've no idea how many credit controllers a factor like Lloyds TSB will have but it could well be 100. As an ex factoring company Operations Director I can tell you that not all staff are equal and every factor will have good credit controllers and bad ones too so your method certainly isn't foolproof.

My experience has told me that it is there to help you with cashflow but can cost between 3-10% of an invoice

I doubt that there are many companies who's factoring costs are 10% of invoice values with a figure between 3% and 5% being more like a reasonable average.

Whether or not this is expensive depends on what the company does with the money as the well run company will use the funds generated from factoring to expand the business and generate higher profits.

One may apply the words of Mr Micawber who famously said that "Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Factoring costs £5,000, extra profit generated £7,500 - happiness

[NikkiPilkington]

hehe I do love the word 'twaddle'

I also love the fact that forums allow others to express opinions. And my comment was that - an opinion

[Ian J]

Originally Posted by NikkiPilkington

I also love the fact that forums allow others to express opinions. And my comment was that - an opinion

Of course - and so was mine.

Whenever factoring is mentioned on forums it seems that there is always a queue of people ready to slag it off for reasons that tend to be rather unjust yet if a company has a poor website I don't see others complaining that web designers ruin your business etc etc etc.

There are quite a few people who will happily complain that their factoring facility wasn't successful but in very many of the cases closer examination shows that the problems lay with the company and not the factor.

Time and time again I have been approached by companies complaining about their factor who they complain was absolutely useless and asking me to find them someone more commercial yet when it comes to the crunch it has transpired that the problems between factor and client were caused by the client pre-invoicing or banking the factor's cheques or "forgetting" to issue credit notes for goods returned.

There are some poor factoring companies around otherwise there wouldn't be any need for people like me but there is more than one side to many of the stories that abound on the net

[jijwhite]

Hi Ian

How can an actual example of what happened to me and my company be twaddle??

I have no axe to grind against a particular part of the finance world. Far from it. I know that it was not twaddle as I had I had 2 banks tell me that Invoice Finance was not relevant for some of the work that we did. HSBC and Barclays. Both in Somerset. Maybe you should run a course for banks around this area?? 

1 was a large piece of CRM consultancy work and the second included a large bespoke SaaS development project for a Govt client. We had confirmed Sales Orders for both and I was told both were not suited for Invoice Financing.

Whether its due to the knowledge of the bank involved or the person involved, it was what I was told.

With that in mind, I moved on.

Feel free to express your views on here. I am new to this forum and so don't wish to castigate another member but please don't go and indicate what I have said is twaddle when it’s a fact of what happened

James




don't know what it is about the subject of factoring that generates so much twaddle on forums


Quote:
Originally Posted by jijwhite
It can work well if you have a physical product to sell but if your service based (even with large contracts) then its unlikely you will get much joy.

You are actually quite wrong as the largest market sector who use factoring or invoice discounting are recruitment contractors who need to pay their contractors weekly or monthly bang on the nail but will be waiting for 30, 45 or 60 days for their customer to pay them.

[Ian J]

Originally Posted by jijwhite

1 was a large piece of CRM consultancy work and the second included a large bespoke SaaS development project for a Govt client. We had confirmed Sales Orders for both and I was told both were not suited for Invoice Financing.

Whether its due to the knowledge of the bank involved or the person involved, it was what I was told.

I'm afraid that the type of work that you indicated is probably not suitable for factoring at all as the factors don't like "one offs" especially if there are progress payments involved

[jijwhite]

So my original post below is not twaddle then??? Apology accepted!!!

Originally Posted by jijwhite
It can work well if you have a physical product to sell but if your service based (even with large contracts) then its unlikely you will get much joy.

[Ian J]

As I said, the majority of new clients being taken on by factors in the last few years have been serviced based.

What factoring is not suitable for is companies that have large contracts which include performance obligations and interim payments, due to the contractual obligations involved. This applies to companies in the construction industry but there are service companies to whom it also applies.

[jijwhite]

Please don't bother replying as your clearly unable to consider apologising when you quote someone's comments as twaddle yet they turn out to be true and accurate

Maybe think next time before hitting the reply button.

[Ian J]

Originally Posted by jijwhite

Please don't bother replying as your clearly unable to consider apologising when you quote someone's comments as twaddle yet they turn out to be true and accurate

Maybe think next time before hitting the reply button.

So let's review your true and accurate comments:-

Originally Posted by jijwhite

My experience has told me that it is there to help you with cashflow but can cost between 3-10% of an invoice which is a lot of margin to use.

Wrong - it very rarely costs anything like 10% of an invoice

Originally Posted by jijwhite

It can work well if you have a physical product to sell but if your service based (even with large contracts) then its unlikely you will get much joy.

Wrong - The majority of companies taken on for factoring in the last couple of years have been service based.

Originally Posted by jijwhite

I think it has its place

I can agree with that comment at least