Factoring for Growth. Can Banks keep up?

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.

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Factoring, Business, and Invoice Discounting Finance

We have updated our factoring page with new content.

Factoring, Business, and Invoice Discounting Finance.

First Factor UK launches updated advice on Factoring and Invoice Discounting designed to provid invaluable insights into the Factoring and Confidential Invoice Discounting finance facilities.

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Invoice Discounting

About Invoice Discounting

Confidential Invoice Discounting is an invoice-financing product that releases working capital tied up in outstanding invoices immediately.

How often has the elation of securing a new customer or large order subsided with a sinking feeling when you turn your attention to how it will be funded. Confidential Invoice Discounting makes it easy. The more you invoice the more working capital is instantly made available. No more waiting 30, 60 or 90 days for payment.  Confidential Invoice Discounting grows with you providing you access to your working capital that would have otherwise be tied up in outstanding debtors. And best of all its Confidential, your customers are not made aware you are using the service.

You retain responsibility for running your sales ledger; delivering goods, raising invoices even collecting the debt when it falls due. You simply provide sufficient information to the Confidential Invoice Discounting Company so they can understand the status of your sales ledger.

As no two companies are alike, no two Confidential Invoice Discounting Companies are either. Estimates differ just how many Companies provide forms of Confidential Invoice Discounting services in the UK and Ireland, its somewhere between fifty and a hundred. What constitutes an acceptable invoice or customer also differs from company to company; combine this to the acceptable age of invoices, the concentration of debtors and the sector you operate within selecting the right Confidential Invoice Discounting Company can be very time consuming to achieve the best deal.

Full sales ledgers, part ledgers, single invoices or individual customers can be included. Without doubt, Confidential Invoice Discounting is one of the most flexible services business can use to release working capital. It can be a cost effective option too. With the additional working capital you could, buy more product at a cheaper price, increase your product range, fund work in progress, pay suppliers quicker for a discount or simply fund new sales.

If you would like to find out more and talk through the costs of confidential Invoice Discounting contact firstfactoruk.com.

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Asset Based Finance Association (“ABFA”)

Promoting & Representing the Interests of members

The Asset Based Finance Association (“ABFA”) is a UK and Ireland based trade association representing the Invoice Financing Sector. The ABFA is an amalgam of three rival industry bodies unified in 2007. They claim that its members have been providing businesses with liquidity and working capital for over 50 years. However, the product itself dates Bank hundreds of years before the formation of the ABFA.

In 2010 ABFA’s members in the UK and Ireland provided financing to around 42,000 businesses (serving primarily the manufacturing, distribution, transport, service, retail and construction sectors) and transacted over £212 billion of clients’ invoices each year. The industry advanced in excess of £14 billion against invoices and other assets such as stock, property, plant and machinery. With these impressive figures, you would expect the Financial Services Authority or some other professional independent authority would regulate this sector. Unfortunately, not. The whole sector is completely unregulated. Effectively the industry regulates itself through a voluntary code of conduct. Industry pundits have speculated for sometime how long it will be before regulation will be brought in. Nothing appears imminent.

There are currently three different types of ABFA membership available:

  • Full Member
  • Worldwide Group Member
  • Worldwide Associate Member

Full Membership of the ABFA is open to UK and Irish companies only. Worldwide Group Membership is open to any company belonging to a group where there is at least one Full ABFA Member. Worldwide Associate Membership is designed for any company where there is no Full ABFA Member. In addition, in order to be a Full Member of the ABFA an organisation must meet the following requirements:

  • Be established for more than 12 months
  • Have a net worth of over £1 million
  • 75% of the business must come from Asset Based Finance
  • Their clients’ debts must not have been pledged to any lenders beyond that advanced to each individual client

The financial turmoil has left Factoring and Invoice Discounting customers wondering, “how safe is my Factoring Company”. The ABFA’s entry criterion does little to reassure concerned users. Members range from well-known High Street Banks, Small Banks, Merchant Banks, Building Societies, General Finance Houses and independent businesses. Therefore, being a member of the ABFA gives no direct confidence over the financial standing of the ABFA member for the user. After all the aim of the ABFA is “Promoting & Representing the Interests of members” not acting as a Financial Regulator.

One question that we keep being asked is “what code of conduct do ABFA members use”. The ABFA do produce a code of conduct, which all members must accept (you can review a copy here). However, the code of conduct has no powers of arbitration or alternative dispute resolution for instance. The ABFA’s Code of Business Practice, July 2008 Edition states that:

 “The ABFA expects all members to adhere to this Code. However third parties should be aware that under its Memorandum of Association, publicly filed at Companies House, the ABFA is not a public regulatory authority and has no financial or other responsibility to any persons arising out of the financial or other dealings of its members”

The ABFA seems to act more like a training, reporting and lobbying body. They pro-actively publish their role as:

  • Education and Training
  • Events
  • Industry News
  • Lobbying
  • Member Guidelines
  • Public Relations
  • Source of Industry Information
  • Statistics

Conclusion

Asset Based Finance Association presently publicises that it exists to “promote & represent the Interests of members”. In the absence of direct government financial regulation, the industry has sort to an extent to self regulate through the ABFA. While this has to be welcomed unfortunately, amid the turmoil of the latest, phase of the financial crisis, in reality it offers little by way of tangible benefit to users of ABFA’s members services.

Using a specialist Factoring, Confidential Invoice Discounting or Asset Based Lending Broker like firstfactoruk.com can provide a valuable insight into ABFA members services.

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Asset Based Finance Association Code of Business Practice

This is the Asset Based Finance Associations code of business practice

July 2008 Edition

1.     Introduction

The objects for which the Asset Based Finance Association (“ABFA”) has been set up are:

  • to promote the current asset based working capital finance services provided by ABFA members
  • to provide education courses and training opportunities for people working in the Industry
  • to promote and represent the interests of ABFA members in a national and global environment
  • to encourage co-operation and communication between ABFA members and those who provide services to the Industry

In support of these objectives the Executive Committee of the ABFA has published this Code of Business Practice.

 2.    Purpose and scope of this Code

Members of the ABFA must be prepared to operate fairly and reasonably in accordance with the ABFA’s standards of good practice, probity and professionalism set out herein. Compliance with this Code, where relevant, is a condition of full membership of the Association.

This Code does not indicate in precise terms events or actions, which must or must not be taken.  It sets out key commitments, and principles which members are expected to apply, with good sense and in the spirit of the Association’s objectives.

The interpretation and application of the principles set out in this Code is the responsibility of the Executive Committee of the ABFA.

From time to time the Executive Committee may issue guidance notes or amendments to this Code.

 3.   Key Commitments:

 Members shall:

  • conduct their business lawfully, comply with all relevant legislation and judicial decisions and trade fairly and responsibly
  • behave at all times with integrity
  • act with care in the day-to-day conduct of their business
  • not knowingly misrepresent facts to a client or prospective client concerning any aspect of a transaction
  • provide adequate education and training for members of their staff, bringing this Code and the principles contained in it to their attention and requiring them to carry out their duties in accordance with it.

4.    Professionalism

Services provided by members shall, in every case, be of the highest quality.  Members of the ABFA are required to set and maintain rigorous and exemplary professional standards within their businesses and in their relationships with clients and others with whom they deal.

5.    Sales Literature and Marketing

Any marketing activity undertaken by a member, whether advertising, sales literature or verbal assertions shall be honest, fair and clearly understandable. Where members use independent introducers of business, all reasonable steps must be taken to ensure that the introducer upholds the same standards and does not misrepresent facts regarding a member’s services or any proposed transaction.

Members shall ensure that any services promoted are genuinely available to the quality described.

Advertisements must not infringe the British Code of Advertising Practice or the equivalent Irish code.

Members should, in their negotiations with prospective clients, always ensure that disclosure is made of commission payable to an introducer, whatever the agency status (or otherwise) of the introducer”

6.    Clarity of Arrangements

Any documents evidencing the services to be provided by members shall clearly state the rights and duties of both parties to the arrangement. In particular, the following must be unambiguous, fair and reasonable:

  • charges
  • interest and/or discount
  • any minimum period for the relationship
  • any period of notice to terminate the arrangement

It is advisable that any method and/or amount of any charges arising upon early termination are clearly set out in the Master Agreement. Where such charges are levied a breakdown of their calculation should be given.

7.    Confidentiality of Information

Members must respect the confidentiality of information supplied to them by clients or prospective clients.  Information must only be disclosed to external parties if required by law or public duty or if an informed consent has been clearly been given. Members are reminded of their duties of confidentiality imposed by the Data Protection Act 1998.

8.    Settlement of Credit Protection

Members who provide credit protection must promptly settle any bad debt losses relating to credit approved debts, in accordance with the terms of their legal agreement with the client.

9.    Transfer to another Factor/Discounter/ABL

Members will facilitate the move from one factor to another, should a client wish to make such a change.  The ABFA has an established set of procedures to facilitate the smooth transfer of clients between members that should be used wherever possible.

10.    Improper or Unfair Advantage

Members must not take improper or unfair advantage of either their position as members of the ABFA or of any information provided by the ABFA.

11.  Complaints

Members must deal promptly and fairly with disputes and complaints from clients and their customers.  Any client making contact with the ABFA will be encouraged to take up their complaint with the Managing Director of the member concerned. Complainants must appreciate that this Code is only for use between the Association and its members. It does not give rights to any other parties.

12.  Conclusion

The ABFA expects all members to adhere to this Code. However third parties should be aware that under its Memorandum of Association, publicly filed at Companies House, the ABFA is not a public regulatory authority and has no financial or other responsibility to any persons arising out of the financial or other dealings of its members.

This Code was approved and adopted by the Executive Committee of the Factors and Discounters Association on 26 March 2008  pursuant to Article 65 of the ABFA’s Articles of Association.

  

­­­­­­­­­­­­­_________________________

Ted Ettershank

Chairman of the Association

 

 

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Asset Based Lenders Association

Asset Based Lending

The Asset Based Finance Association (“ABFA”) is a UK and Ireland focused trade association representing companies that provide Factoring, Invoice Discounting and Asset Based Lending services. Its members are said to have been supplying theses services for over forty years albeit Factoring has been around as a product for hundreds of years in one guise or another.

The generic term “Asset based Lending” has only been around for the last five years. It is meant to encapsulate the expansion of Factoring and Invoice Discounting Companies services to include services like Asset & Stock Finance, Credit Cards or other business financial service products bundled together.

Originally, the trade association was called the Association of British Factors and Discounters and was founded in 1976. They merged with another UK rival industry association in 1996 and became the unified UK and Irish industry association changing their name to the Asset Based Lenders Association in 1996.

The industry has circa 45 members including all the major UK high Street Banks with the aim of promoting & representing the interests of members. The ABFA lists their main activities as:

  • Education and Training
  • Events
  • Industry News
  • Lobbying
  • Member Guidelines
  • Public Relations
  • Source of Industry Information
  • Industry Statistics

The invoice-financing sector is unregulated by the Financial Services Authority and is probably the largest segment of business financial services market to remain so. The Asset Based Lenders Association is a self-regulated body. The Chairman and Vice-Chairman are elected by the Members from the members and serve one year each, with the Vice-Chairman going on to be become Chairman after a year in the supportive role. Currently there are 11 members on the Executive Committee who represent a cross section of the Member companies and who are voted onto the Executive and put up for re-election by the Members once a year.

Asset Based Lenders Association Membership Criteria

There are three different tiers of ABFA membership:

  • Full Member
  • World-wide
  • Group Member
  • World-wide Associate Member

Full Membership of the ABFA is open to UK and Irish companies only. World-wide
Group Membership is open to any company belonging to a group where there is
at least one Full ABFA Member. World-wide Associate Membership is designed for
any company where there is no Full ABFA Member.

In addition, in order to be a Full Member of the ABFA an organisation must meet
the following requirements:

  • Be established for more than 12 months
  • Have a net worth of over £1 million
  • 75% of the business must come from Asset Based Finance
  • Their clients’ debts must not have been pledged to any lenders beyond that advanced to each individual client

To learn more about the Invoice finance market please contact us.

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Factoring Solutions, sorted with 4 days!

Last week I got a call from a company who’d won a big order from Tesco, needed a Trade Finance and Factoring solution immediately to fund the gaps and maintain healthy cash flow.

Sorted within 4 days!

Factoring solutions are becoming more popular especially when a lender can provide such a speedy solution to a cash flow need.

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Asset based lending (ABL)

Use of asset based lending set to increase during credit crunch

Private equity, corporate finance, hedge funds and businesses now see asset based lending as a better proposition than leveraged finance ABL offers one of few current methods of tackling cash flow issues Lack of liquidity in lending banks mean businesses are increasingly turning to using asset based borrowing New research by the Asset Based Finance Association shows that beleaguered firms across the UK are increasingly using asset based lending as a means of raising funds and capital during the credit crunch.

Asset based lending (ABL) is a form of financing that allows a business to borrow capital against its property, plant, machinery, stock and debtors. In ABL, lenders can share risk by forming large syndicates, or deals can be completed as a single financier.

When surveyed, 64 per cent of respondents, (such as dealmakers in the M&A community, corporate financiers, banks, private equity companies and hedge funds), saw ABL as a mature product, having proven its worth in the market. Of the 45 per cent surveyed, many lenders are considering a switch to ABL and of those ABL deals completed in the last 12 months, the deal values had ranged from £5 million to nearly $1 billion (US dollars), with the added benefit that ABL often assists the way that working capital is managed in a business.

The survey results also show that whereas EBITDA multiples have traditionally been used as a basis for lending, lenders using ABL consider a wider range of criteria when assessing the potential of a company, including asset valuation and the value of trade debtors. Over 60 per cent of those surveyed saw ABL as strong in the current climate for raising new money, offering liquidity, offering a facility for increasingly hard-to-come-by cash flow lending and providing a means by which to “sweat” assets that are idle.

Commenting on the survey, ABFA’s Chief Executive Kate Sharp said:

“The survey points out some important trends. With liquidity and availability of corporate finance almost non-existent, companies and advisors have discovered the benefits of asset based lending as a means to secure medium-term financing. ABL gives a robust method of financing a deal, where risks can be shared and secured against real world, hard assets.”

“ABL’s value in corporate finance has been recognised amongst financiers and businesses alike as very flexible and able to be tailored to almost any business at any stage in its lifecycle, ranging from management buy-out to merger or refinancing or turnaround. ABL is now considered a mainstream form of financing and the fact that loans are guaranteed against corporate assets makes it much more attractive in the current economic climate.”

“In the next twelve months, we are going to see a many more businesses looking for turnaround deals due to underperformance and this is where ABL is perfectly placed to help.”

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The History of Factoring

Factoring companies, how did factoring companies start and how have factoring companies grown to their current market dominance.

Factoring companies are now universally accepted as vital to the financial needs of small and medium-sized businesses. Factoring companies have the support of government offices and central banks throughout the world. But how did factoring companies start and how have factoring companies grown to their current market dominance?

Factoring companies produce immediate cash payments to a company at the time of shipment, delivery and invoicing a customer. In its basic form, factoring companies, provide services known as invoice factoring, invoice discounting, invoice finance and account receivable factoring. Factoring companies have been used by American business since Colonial times, and factoring companies origins go back even further, literally thousands of years to the early days of commerce.

Factoring is said to date back about 4,000 years to the cradle of civilization, Bronze Age Mesopotamia, which included the Akkadian, Assyrian, Babylonian and the Sumer empires.

Later it was the Romans who began selling promissory notes at a discount – yet another form of factoring (still provided by factoring companies today). However, the first documented use of factoring companies is said to have occurred in America some time before the American Civil War, when animal furs, cotton, and even materials such as timber were shipped from the colonies to Europe using intermediaries or factoring companies.

Others will tell you to look back in British history to the sixteenth century, when the new territories like the USA were being opened up and when most manufactured goods for those territories came from Europe. Owing to the slow communication and transport of these times, to sell in another territory it was a necessity to appoint an agent in the territory to find the customers, sell and deliver the goods for the principal and hold the principal’s goods on consignment. This is thought to be the first real factoring companies.

The early Factoring companies combined trading, banking, accounting and shipping to facilitate trade and open up new commercial frontiers. Several commission companies (Factoring companies) were formed in New York and were backed by European merchants and producers in Manchester, Liverpool, London, Paris, Lyons, Zurich, Hamburg, Bremen, Cologne, Amsterdam, Rotterdam, Antwerp and numerous other trading cities.

A great illustration of the role of Factoring companies is the “cotton-Factors” in the United States in the early 19th century. Cotton was exported from the South to New York and Europe. Eighty percent of the U.S. cotton crop was sent to Europe. Extended transportation and warehousing periods caused long delays from the harvest until the payment from the spinning mill. Thus, the need for factoring companies to advance money against orders became very important to the growers so the growers could continue operations while waiting for the payment the funds to travel back to them.

It is said that almost every civilization since that valued commerce has practiced in some form of factoring.

Today factoring companies provide a valuable global financing tool. Factoring companies are now universally accepted as vital to the financial needs of small and medium-sized businesses. Factoring companies have the support of government offices and central banks throughout the world.

Posted in Factoring, Invoice Discounting | Tagged | 15 Comments