By Nick Sellars, Group Managing Director
There are still several myths and misconceptions surrounding the factoring sector. At, we believe that factoring in the right circumstances as the best finance and credit control option available to many businesses today. So, let’s dispel a few of these myths and promote factoring as one of the best working capital solutions available to SMEs today.
Factoring has been disguised under different names and terminologies for as long as we can remember. Today invoice finance is the commonly used name which covers both invoice discounting and factoring. We’ll save you the pain of defining them on this occasion.
Factoring is a mainstream product for thousands of businesses in the UK, but in some quarters there still appears a reluctance to embrace the service seemingly due to a lack of knowledge and understanding, and perhaps also some uncomplimentary press coverage over the years.
There are several misconceptions raised when discussing factoring and these are sometimes voiced by the very accountants that are advising SMEs.
“Factoring is for companies that are about to go out of business”
When factoring in the UK was in its infancy, most businesses were financed through their local bank branch often by overdraft facility, in the days when close personal relationship with the local bank manager were common place. At that time factoring may well have been used as a last-ditch effort to refinance business with debt issues, which sometimes worked, but at times didn’t.
Banks, through their subsidiaries, were sharp enough to identify the effectiveness of factoring as a style of borrowing with the real time book debt security to cover the risk. The independent factor took up the mantle to offer a higher service led offering, and today there are a range of services, with different levels of service used not only by companies that require the day to day working capital to bridge the gap in the cash flow cycle and shorten the payment cycle to ease creditor pressure to pay on time.
“I can’t factor my debt because my customer has a ban on assignment clause in their terms and conditions”
Some businesses, especially in Government & Construction industries subject to a contractual arrangement, include a standard ‘Ban of Assignment’ clause which advises that you must first seek written permission to ‘assign’ any part of the agreement or benefit of the agreement (payment) to a Third Party. This clause is not directly aimed at the factor to which invoices are assigned but more outsourcing works to a third party which may in some way be a benefit to a competitor to your customer. It is often the Company’s relationship with the debtor that will decide if that debtor is happy to work with their supplier to provide a benefit to both parties. Reluctance from debtors is rare and can usually be managed by being proactive with them. There are of course, exceptions to this, which is why 4Syte, when structuring deals, will make exceptions and run some debtors on a confidential basis, more often within 4Syte Construction Finance.
“Factoring is expensive”
The service we run not only reflects the risk of the money we provide, but also the extensive service we offer to ensure that cash flows smoothly and the level of financing is not restrictive because of credit limits or other issues. At 4Syte we make sure that our clients always have a member of staff dedicated to their Client available at the end of the phone to meet their needs. Most businesses appreciate this and thrive on the personal relationship. This is why we have a ‘Service’ charge because we provide a real service. We believe this offers real value for money and is not prohibitive. In some circumstances, we save our clients’ money, because the cost of a 4Syte dedicated credit controller is a fraction of the cost of employing their own. So, we urge all business owners whose heads are sometimes turned by a cheap deal elsewhere, to look the cost versus the benefit and analyse what is needed from the relationship and facility.
“Factoring Companies are just Debt Collectors”
Even now some businesses do not have a dedicated resource for chasing past due accounts; in smaller owner managed businesses it is common that the Business Owner is also the Sales Manager, the Office Manager and the Delivery Driver. When introduced to a prospect, the first thing that we look at is the condition of the sales ledger, and it is easy to identify in some instances that it may need a ‘bit of work’ to first bring the past due items down to a workable figure, and secondly bring the average Debtor days down to improve cash flow. A proper credit control strategy will be discussed and agreed with the business owner. It’s not about hounding customers; it’s about delivering an on-going expectation to pay on time.
In a fast-changing financial environment with new lenders coming in to the market with new services, it is important that professional advisers, accountants and introducers have the necessary resources and information to hand, so that their clients can find the right home for their needs at the time. Hopefully, we can dispel at least few of the myths that surround factoring and promote a great solution to cashflow finance.