We are experiencing more and more small businesses being affected by the banking community’s efforts to tighten up their credit facilities and having their availability to obtain working capital continually squeezed. Unfortunately, Banks all over the UK seem to be all too eager to advise their borrowers that they have breached some restrictive covenant in their terms and conditions and now wish to renegotiate their terms conditions (often midterm). At annual review time, we are all so evidencing facilities being renegotiation against security that up until a couple of years ago had been considered totally satisfactory. This comes at an appalling time when profitability is down and balance sheets have suffered. All this serves to compound small businesses attempts to struggle to stay in business let alone looking for additional working capital to grow and expand the business.
Have you heard your Bank talking about “undercapitalised balance sheets”? As the economy continues to suffer it is almost inevitable that Bank lending criterion will be constricted even further as UK Banks struggle to recover from the Banking crash. Credit lending standards have certainly tightened throughout 2010 & 2011 with business owners now more acutely aware of the disciplines required from Banks.
Thought about Factoring?
Factoring and its bigger brother Confidential Invoice Discounting are one of the best-kept secrets in the commercial finance sector available in the UK. Even though the UK and Ireland are the largest invoice financing markets in the world the concept of factoring your outstanding debtor book for operating working capital is still not widely considered. Your debtors may well be your largest asset on your balance sheet but all too often, they absorb the most working capital. Factoring releases, the working capital tied up in your outstanding invoices instantly. As you grow, the facility will grow with you.
Can your bank keep up with your increase in demand?
Pinning the amount of your Banking lines against your historical balance sheet security maybe just storing up a time bomb waiting to go off. What happens if you obtain a surge in demand or a larger customer starts to take longer credit terms?
Some firms are almost forced to sacrifice margin by offering customers a discount in exchange for quicker payment. Discounts of 5, 10 and 15% are not uncommon. Understandably, this strategy has a number of immediate benefits. However, it also has one very sober long-term drawback. It leaves your customers in full control of your cash flow. Conversely due consideration should be given to what would happen if your customer decides to return to their normal terms or worse still take extended terms. The advantageous alternative is to accelerate your cash flow by releasing cash tied up in debtors through factoring.
How does Factoring work?
Factoring offers a very simple solution. A factoring company advances usually up to 90% of your outstanding invoices immediately. Thereafter when you raise fresh invoices you can call on up to 90% of their value too, ongoing. When the customer pays the 10% not advanced against is return to you less the factoring Company’s charges.
Factoring is a financial tool to accelerate your cash flow, in essence your firm no longer has to wait 30, 60 or 90 days for payment. The factoring company can also take over the risk of bad debts, providing you with the peace of mind. Factoring releases you from the restrains of your balance sheet by valuing the quality of your debtors and service you provide now and in the future. The more you invoice to credit worth customers the more the factoring facility will instantly grow with you.
To find out more about your Factoring options please call us for a free no obligation confidential chat.