Factoring or invoice discounting? Factoring is where you hand over the whole cash collection process to the provider compared to Discounting, where the responsibility for cash collection remains with yourself.
In the past, I've received service off three of the high street banks, and in my experience they are better suited to discounting rather than full factoring.
If you've already decided factoring is the way forward then whichever company you decide to use (high street bank or other) make sure you understand what they're going to provide to you before you sign up. For example:
- Clarify how much time the assigned credit controller will spend on your account. Unless your a larger client, your credit controller will probably be working on behalf of two or three different companies. You may think (or are given the impression) you're paying for an outsourced credit controller 5 days per week, but the reality can be very different.
- Ensure the assigned credit controller understands your business and your industry. A company providing IT software solutions is operating in a totally different industry to a company in the construction industry - your credit controller should appreciate & understand the differences. If they don't, your cash collection will suffer (and their fees to you will increase).
- Ensure you get the maximum upfront drawdown payment from the outset. If the factoring company offer 80%, push for 85%. Despite all the talk of credit crunch, bank managers that I've met recently tell me that they all have plenty of credit to lend as long as the client supplies the appropriate information.
- Ensure you maximise the number of days before they return unpaid debt to you. If you approach the point where debt may be returned unpaid, but the onus on the factoring company. For example, what have they failed to do to collect the cash. This leads me onto my next point...
- Make sure your cash collection cycle is operating correctly. Have you invoiced the agreed amount, was the invoice addressed correctly, was it for the attention of the right person etc. Basically, eliminate any errors from the process that cause the factoring company difficulty in collecting the cash.
My advice is not to factor at all, unless you ae absolutely desperate for cash, and you've tried every other source of finance and been unsuccessful. If you're credit control process is not abslutely spot-on BEFORE you start factoring, you WILL end up having difficulties getting your invoices paid and consequently, your money.
If you've decided that you are going to factor, get a solicitor to check over the agreement before you sign it.
In a previous role as a Director of a business development cosultancy, I got screwed to the total of £50K by a factoring company who didn't understand how to credit control service-based accounts. Get references, talk to real live clients, preferably in a similar industry to yours. Proceed only when you are absolutely satisfied that it is the right decision, and keep in regular contact with your allocated credit controller and your clients' accounts person / people and resolve any niggly problems before they become show-stopers.
My
Regards,
Dan
(not a fan of factoring companies - can you tell?!)
We use HSBC invoice factoring and have no problems at all, to be honest a lot of our smaller clients actually like it as they feel it must be good as a large bank is running it !
For us we have the added bonus of getting 85% of the cash upfront although we don't have cash flow issues. What it also does for us is to allow credit to our clients and if the client is turned down for credit then they don't see it as a personal rejection from ourselves just our factoring company.
As mentioned above as long as the invoices go to the right place and all details are correct then there should be no problems at all. We did have teething trouble for a couple of months although thats all sorted now.
This isn't a direct suggestion for an Invoice Factoring company but I recently wrote a small guide which you may find useful. You can find it at invoicefactoringguide (co.uk) .
I have heard that Close is quite good but again just through the grapevine.
There is a link to simply business in the guide which I suggest taking a look at, at least to compare costs and availability.
Hi - can you give any more detail about why you think factoring is the right thing to do? It may be that there are other and better options.
I have referred some of my clients to a factoring company that they have all worked well with and are very happy with the service and deal that they get. This of course is very important to me, as I will only refer to someone who does a great job and therefore maintains my reputation as well.
If you need more details just PM me.
Hi There:
It pretty much depends on what type of business you have and the volume of business you want to factor.
I don't factor now, but back in 2005-2008 we had several contract to supply kitchens and bathrooms to property developers and we used LLoydstsb Comercial finance. They were by far the cheapest, they advance 75% of the invoice value for which they used to charge 3% over base on the amount borrowed, once your customer pays you, you can withdraw the remaining 25% minus your fees. It worked really well for me and amongst other services they included first check which is a credit check service for prospective customers.
Beware that they will not chase invoices for you and they will finance any invoice for up to 120 days, so you still have to do your homework when it comes to extending credit accounts and chasing payment, specially in the present climate.
As mentioned in some other posts, there are 2 main facets to factoring;
1. Advance of cash against debtors.
2. Collections.
Are you looking to acheive either one or both of these goals?
Either of these facilities can be great as long as you understand where you are going and look into the deal properly, rather than jumping for the lowest headline rate. As with anything, communication is really the key.
As a rule of thumb I would avoid wapping all of your finances into one bundle with your bank, as they can exercise an unhealthy degree of control over your business.
On our website (Business Funding Portal) you can download a free guide to asset finance, much of which is dedicated to debtor finance. Also I will be happy to direct you to our Invoice Finance Partner (who have 20 + years experience) if you require.
As a Commercial Finance Broker but first and foremost a Small Business Owner I would agree with the points made above.
Whether it is Invoice Discounting/ Factoring or any other variant the main benefit is smoothing out the cashflow so that there are fewer peaks and troughs which are usually the cause of so many business failures.
From a cost point of view it is often cheaper than Bank term loand and does indeed grow as the business grows rather than going back to the bank and negaitiating an increased loan with assciated costs.
I have some clients who use Invoice Finance purely for the credit protection facility.
If anyone needs further info on the subject or indeed would like slome competitive quotes please drop me a line.
Have a new client considering this, have sent some of you PM's. Hoping once I start on credit control it won't be an issue.
However, can I ask, from the other side of the fence, would you treat a factors invoice any differently to a suppliers invoice? Would you pay it sooner, later or in same time scale as you would have paid original supplier?
Please do drop us a PM; we have active partners with several decades experience in this market. As ever - advice is always free, confidential & impartial..
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Invoice Factoring recommendation?
