If you are considering Factoring ever wondered what banks consider their target market?
- Manufacturing, distribution, wholesale and service sectors
- Turnover in excess of £150K (actual or projected).
- Limited entities, Sole Trader, Partnership, MBO’s, MBI’s, acquisitions and mergers
- Rapidly increasing turnover
- Where debtor monies are proving more difficult to collect
- Firms unwilling or unable to provide security
- Where Bank has a security shortfall
- Cash flow is tight, or where bad debt is evident
- Selling on open credit to export markets
- Good spread of Debtors
Full Service Factoring
- Additional funding / sales driven
- Improved / predictable cash flow
- Credit Management service
- Efficient sales ledger administration
- Improves management efficiencies
- Optional bad debt protection
- Quality debtor assessment
- No dilution of shareholder equity
- No security required
Export Factoring or Invoice Discounting
Full Service Factoring IS Particularly Suited to Up-and-Coming Small and Medium-Sized Enterprises
Full Service Factoring provides working capital finance – up to 85% (and sometimes up to 100%) of the value of approved debts i.e. the value of those invoices falling within debtor credit limits sanctioned by the Factoring Company. Full Service Factoring can complement existing overdraft or loan facilities.
The credit assessment of client’s debtors is a critical issue. Factoring Companies are looking for your customers to be credit worthy and will use trade reference agencies to obtain an opinion. This would be done without your customer evening knowing it is taking place.
The factoring Company can also usually provide optional protection of bad debts. Monies outstanding from debtors can be underwritten against bad debt arising from the insolvency of the debtor, subject to the establishment of a satisfactory credit limit.
Full Service Factoring also includes credit control and cash collections. Monies outstanding under a client’s sales ledger are “chased” by the factoring Companies Operations staff, in accordance with guidelines advised by their client. The Full Service Factoring will provide complete administration of the sales ledger allowing management to concentrate on developing the business.
Full Service Factoring suitability
Factoring is for sole traders, partnerships or limited companies usually having a turnover in excess of £40,000 per annum. However, it is now possible to Factor single invoiced and debtors, which provides the maximum in flexibility and convenience.
Full Service Factoring Benefits
- Working capital finance tailored to grow in relation to the volume of sales and quality of debtors, not aligned to the value of the assets of the business or it’s owners
- Improved cash flow – cash flow becomes more predictable
- Quality credit control undertaken by experienced staff, with 365 days per year cover
- Protection (optional) against bad debts
- Release of management time
- Reduction in administration costs
- Clients can draw down any amount they choose within funds available and maximum limits approved
Full Service Factoring cost
- Discounting Charge is similar to Bank Overdraft rate expressed as a margin over Base Rate
- Administration Charge – individually assessed and based on the workload. Typically 0.5% to 1.5% of gross turnover
Almost all customers will view the principal benefit of Factoring or Confidential Invoice Discounting to be the financial facility, initially. Almost all customers will subsequently discover that their business realises additional benefits from the service element.
Why won’t my Bank increase my overdraft?
- Debtors are often the most appropriate assets to provide security for working capital, after all they grow as quickly as the company does
- Debtors are often the asset which tie up working capital, so what better asset to use to fund the business?
- The Bank puts higher value on the asset through Invoice Financing, by closer monitoring of your Debtor book
- You need flexibility
- Invoice Finance has no fixed funding limit and grows as you do, unlike the capped overdraft.
Why Factoring or Confidential Invoice Discounting?
- More working capital will be available through this core product, which can be part of a range of services provided by a Bank
- Funding is more available to keep pace with sales growth and will give more flexibility
- Instant access to Invoice Finance account electronically makes transactions easier, to give you peace of mind
- The other benefits of Factoring or Confidential Invoice Discounting will enable you to develop a successful business safely
Debt Collectors Will Upset My Customers?
- No! It is in Factoring or Confidential Invoice Discounting companies interest that you should grow the business and so we are very conscious of the need to promote good debtor relationships
- No! Factoring or Confidential Invoice Discounting companies bring professionalism and “big company” power to collection practice, however Credit control can be firm and professional and still be polite by implementing sound credit management techniques. This is Factoring or Confidential Invoice Discounting companies expertise
- Collection procedures are agreed in advance with you to get the right balance, Maintain appropriate debt turn for the particular industry, Minimise cost of trade credit extend and retain goodwill of debtors.
Isn’t It Expensive Though?
- Not if it helps you increase profits
- The funds will be very similar in cost to overdraft
- The service fee must be viewed against the savings that can be made, and the ability to increase income:
- 10% reduction on debtors of £100K will save £850 per annum (money cost @ 8.5%) plus improvement in liquid capital of £10K
- Better terms from suppliers for early settlement, what discounts can you negotiate?
- Discontinue early settlement discounts to debtors, stop giving margin away
- Postage/stationary/telephone/telex/fax, real costs rarely evaluated
- Bad debt costs. The Factoring or Confidential Invoice Discounting companies will credit check debtors free! What levels of bad debts have you suffered, could these have been avoided
- Legal charges
- No establishment or re-negotiation fees
- Reduce/redeployment credit control staff/premises
- Release management time
- Ability to grow quickly/safely
Exactly How Much Will It Cost?
- Money costs will be very similar to overdraft
- Service fee will depend upon the type of facility, number of the invoices, number of customers and risk assessment for credit protection, if required. Range of charges are between 0.5% and 2.5% of gross turnover
Will My Customers/Suppliers Think I Am Going Bust?
- Not nowadays. To the contrary, many large customers welcome our involvement
- They will get accurate statements and sales ledger administration as part of the customer’s service
- They know the customer can get finance for large orders
- They know the customer has access to credit protection
- They will feel more confident regarding continuity of supply
Over five million debtors deal with Factoring or Confidential Invoice Discounting specialists each year, including all the “big names”. It is not a problem.
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