Changing from Factoring to Asset Base Loan
Discussion
Afternoon All,
I am looking at the feasibility to alter the way my companies cashflow is funded.
Some details :
Manufacturing Business
Limited Company
Turnover £3,000,000
Currently cashflow is funded by Factoring the Sales Book to a value of approx 550k in the worst case.
Business has strong on going order book from primarily blue chip customers who repeat order.
Relationship with customers is generally excellent. They appreciate the technically input we give when developing new products , the quality of our work and technical back up.
We make a small profit generally but in the last three years had fallen into the trap of not maximising our profit and perhaps under charging for our products. This is now reversed. We have also gained a number of new long term products that will return a good profit. We have spent two years plus developing these contracts with our customers . We are now starting to receive the first large production quantity orders from our customers.
The business owns a factory worth £600,000 that we occupy..It has a mortgage remaining of £210,000
I have a house worth realistically £800,000 .It has a mortgage remaining of £300,000
My house other that the mortgage has no other existing guarantees on it.
The limited company is owned by myself and a family member . They are not a director of the business just own a portion of the business..
Two of my bigger customers would support my move away from Factoring back to Asset based loan by reducing their payment of Invoices.
My question is does anyone have experience of moving working capital financing away from Factoring and converting to a asset based loan.
Our properties have significant value in each of them but just sits there not really working for us.
The aim is to reduce the yearly cost and to simplify the financing side as the Factoring takes a lot of my FD's time up.
Your thoughts and recommendation would a great help.
Thanks
.
I am looking at the feasibility to alter the way my companies cashflow is funded.
Some details :
Manufacturing Business
Limited Company
Turnover £3,000,000
Currently cashflow is funded by Factoring the Sales Book to a value of approx 550k in the worst case.
Business has strong on going order book from primarily blue chip customers who repeat order.
Relationship with customers is generally excellent. They appreciate the technically input we give when developing new products , the quality of our work and technical back up.
We make a small profit generally but in the last three years had fallen into the trap of not maximising our profit and perhaps under charging for our products. This is now reversed. We have also gained a number of new long term products that will return a good profit. We have spent two years plus developing these contracts with our customers . We are now starting to receive the first large production quantity orders from our customers.
The business owns a factory worth £600,000 that we occupy..It has a mortgage remaining of £210,000
I have a house worth realistically £800,000 .It has a mortgage remaining of £300,000
My house other that the mortgage has no other existing guarantees on it.
The limited company is owned by myself and a family member . They are not a director of the business just own a portion of the business..
Two of my bigger customers would support my move away from Factoring back to Asset based loan by reducing their payment of Invoices.
My question is does anyone have experience of moving working capital financing away from Factoring and converting to a asset based loan.
Our properties have significant value in each of them but just sits there not really working for us.
The aim is to reduce the yearly cost and to simplify the financing side as the Factoring takes a lot of my FD's time up.
Your thoughts and recommendation would a great help.
Thanks
.
BjornLucky said:
Afternoon All,
I am looking at the feasibility to alter the way my companies cashflow is funded.
Some details :
Manufacturing Business
Limited Company
Turnover £3,000,000
Currently cashflow is funded by Factoring the Sales Book to a value of approx 550k in the worst case.
Business has strong on going order book from primarily blue chip customers who repeat order.
Relationship with customers is generally excellent. They appreciate the technically input we give when developing new products , the quality of our work and technical back up.
We make a small profit generally but in the last three years had fallen into the trap of not maximising our profit and perhaps under charging for our products. This is now reversed. We have also gained a number of new long term products that will return a good profit. We have spent two years plus developing these contracts with our customers . We are now starting to receive the first large production quantity orders from our customers.
The business owns a factory worth £600,000 that we occupy..It has a mortgage remaining of £210,000
I have a house worth realistically £800,000 .It has a mortgage remaining of £300,000
My house other that the mortgage has no other existing guarantees on it.
The limited company is owned by myself and a family member . They are not a director of the business just own a portion of the business..
Two of my bigger customers would support my move away from Factoring back to Asset based loan by reducing their payment of Invoices.
My question is does anyone have experience of moving working capital financing away from Factoring and converting to a asset based loan.
Our properties have significant value in each of them but just sits there not really working for us.
The aim is to reduce the yearly cost and to simplify the financing side as the Factoring takes a lot of my FD's time up.
Your thoughts and recommendation would a great help.
Thanks
Out of interest, why would it your customer's concern how to fund your cashflow?I am looking at the feasibility to alter the way my companies cashflow is funded.
Some details :
Manufacturing Business
Limited Company
Turnover £3,000,000
Currently cashflow is funded by Factoring the Sales Book to a value of approx 550k in the worst case.
Business has strong on going order book from primarily blue chip customers who repeat order.
Relationship with customers is generally excellent. They appreciate the technically input we give when developing new products , the quality of our work and technical back up.
We make a small profit generally but in the last three years had fallen into the trap of not maximising our profit and perhaps under charging for our products. This is now reversed. We have also gained a number of new long term products that will return a good profit. We have spent two years plus developing these contracts with our customers . We are now starting to receive the first large production quantity orders from our customers.
The business owns a factory worth £600,000 that we occupy..It has a mortgage remaining of £210,000
I have a house worth realistically £800,000 .It has a mortgage remaining of £300,000
My house other that the mortgage has no other existing guarantees on it.
The limited company is owned by myself and a family member . They are not a director of the business just own a portion of the business..
Two of my bigger customers would support my move away from Factoring back to Asset based loan by reducing their payment of Invoices.
My question is does anyone have experience of moving working capital financing away from Factoring and converting to a asset based loan.
Our properties have significant value in each of them but just sits there not really working for us.
The aim is to reduce the yearly cost and to simplify the financing side as the Factoring takes a lot of my FD's time up.
Your thoughts and recommendation would a great help.
Thanks
From what you are saying, the company has its pricing right now, and therefore is likely to start making some decent money from what is a healthy turnover and a good order book. That in itself should quickly start to turnaround the cash position (assuming you don't start increasing the money you take out of the business).
I've not used invoice factoring myself, but I would guess you can control the level of cash advance you request based on the cash need of the business.
If that is the case, it might be easiest if both shareholders can perhaps remortgage personally and add in say £100,000 each in director's loans. You will be paying the extra interest cost from taxed personal income but I would think it would be the easiest and most flexible way of adding cash to the business.
From there you could taper down on the level of invoice factoring you require until you are able to ween yourself of it altogether.
EddieSteadyGo said:
Out of interest, why would it your customer's concern how to fund your cashflow?
From what you are saying, the company has its pricing right now, and therefore is likely to start making some decent money from what is a healthy turnover and a good order book. That in itself should quickly start to turnaround the cash position (assuming you don't start increasing the money you take out of the business).
I've not used invoice factoring myself, but I would guess you can control the level of cash advance you request based on the cash need of the business.
If that is the case, it might be easiest if both shareholders can perhaps remortgage personally and add in say £100,000 each in director's loans. You will be paying the extra interest cost from taxed personal income but I would think it would be the easiest and most flexible way of adding cash to the business.
From there you could taper down on the level of invoice factoring you require until you are able to ween yourself of it altogether.
Ok so not only do have no knowledge or experience of factoring you’ve commented!From what you are saying, the company has its pricing right now, and therefore is likely to start making some decent money from what is a healthy turnover and a good order book. That in itself should quickly start to turnaround the cash position (assuming you don't start increasing the money you take out of the business).
I've not used invoice factoring myself, but I would guess you can control the level of cash advance you request based on the cash need of the business.
If that is the case, it might be easiest if both shareholders can perhaps remortgage personally and add in say £100,000 each in director's loans. You will be paying the extra interest cost from taxed personal income but I would think it would be the easiest and most flexible way of adding cash to the business.
From there you could taper down on the level of invoice factoring you require until you are able to ween yourself of it altogether.
Factoring can really get customers’ backs up...
1. Factoring is rediculously expensive the real cost is 12 to 15 per cent of the invoice value - this winds up some customers at it shows the margins. It can also show the company is in a weak position.
2. Factoring companies are a nightmare both to the customer as the factoring company deals directly with the customer and often hounds them for payment etc
Factoring companies will and do make companies insolvent at the drop of a hat when they don’t like how payments are progressing; factoring can be a world of pain. Factoring companies know the ins and outs of your business and are not impartial. And for this reason some customers refuse to deal with businesses that factor.
OP I run a business which is getting to the point where it’s either going to be factoring or secured second charge finance.
Secured second charge lending, is potentially much more efficient. You should be able to raise £500k at base plus 5 percent so much cheaper than factoring. A factoring company will take your house if needed so may as well go down second charge lending.
nct001 said:
Ok so not only do have no knowledge or experience of factoring you’ve commented!
Factoring can really get customers’ backs up...
1. Factoring is rediculously expensive the real cost is 12 to 15 per cent of the invoice value - this winds up some customers at it shows the margins. It can also show the company is in a weak position.
2. Factoring companies are a nightmare both to the customer as the factoring company deals directly with the customer and often hounds them for payment etc
Factoring companies will and do make companies insolvent at the drop of a hat when they don’t like how payments are progressing; factoring can be a world of pain. Factoring companies know the ins and outs of your business and are not impartial. And for this reason some customers refuse to deal with businesses that factor.
OP I run a business which is getting to the point where it’s either going to be factoring or secured second charge finance.
Secured second charge lending, is potentially much more efficient. You should be able to raise £500k at base plus 5 percent so much cheaper than factoring. A factoring company will take your house if needed so may as well go down second charge lending.
Ok, so fair point, I don't use factoring. I can presume from your reply that the customers must have to always send their invoices to the factoring company. I thought there was the option where it could be done surreptitiously, but it sounds like I was mistaken on this point.Factoring can really get customers’ backs up...
1. Factoring is rediculously expensive the real cost is 12 to 15 per cent of the invoice value - this winds up some customers at it shows the margins. It can also show the company is in a weak position.
2. Factoring companies are a nightmare both to the customer as the factoring company deals directly with the customer and often hounds them for payment etc
Factoring companies will and do make companies insolvent at the drop of a hat when they don’t like how payments are progressing; factoring can be a world of pain. Factoring companies know the ins and outs of your business and are not impartial. And for this reason some customers refuse to deal with businesses that factor.
OP I run a business which is getting to the point where it’s either going to be factoring or secured second charge finance.
Secured second charge lending, is potentially much more efficient. You should be able to raise £500k at base plus 5 percent so much cheaper than factoring. A factoring company will take your house if needed so may as well go down second charge lending.
However, I hope my other comments to the OP were helpful. After all, not every comment will be "rediculously" useful.
Can you see a way to get away from the need for finance full stop?
Quicker payment from customers (discounted if needed), a little bit more time to pay suppliers?
Take a bit less yourself / divis for a bit?
Short term hit, but to get yourself free of the leeching, robbing factor roundabout and be free and clear would feel great and must be worth the thick end of £50k a year to you
Quicker payment from customers (discounted if needed), a little bit more time to pay suppliers?
Take a bit less yourself / divis for a bit?
Short term hit, but to get yourself free of the leeching, robbing factor roundabout and be free and clear would feel great and must be worth the thick end of £50k a year to you
Thanks all for your thoughts
Yes Invoice Factoring is very expensive and time consuming to manage. We have had some customers who have been upset by the Factors clerks when checking balances etc
Two of our bigger customers have offered to pay invoices to us very promptly if it will help us extract ourself from factoring. It seems a good time to investigate the possibility of borrowing against our property to fund working capital
Yes Invoice Factoring is very expensive and time consuming to manage. We have had some customers who have been upset by the Factors clerks when checking balances etc
Two of our bigger customers have offered to pay invoices to us very promptly if it will help us extract ourself from factoring. It seems a good time to investigate the possibility of borrowing against our property to fund working capital
At your scale, you ought to be able to move to Confidential Invoice Discounting. That stops the customers seeing you're factoring, which helps you to negotiate pricing.
In my experience, factors' credit controllers are awful and can really harm customer relationships - whilst simultaneously not actually collecting quickly!
In the past, I moved from factoring to CID and set up my own credit control operation. The latter was so good that I then sold that service to others.
Re moving, why move? Why not just reduce the amount you draw down over time? Once that reaches zero, kill the deal.
Is the factoring secured on your house? If not then you're unilaterally giving up an unpledged asset for little benefit. Business can change. Your nest egg is what you're offering up here. I would caution against it.
From what little I know, I would say:
- swap to CID
- plan to over time gradually reduce drawdown, especially by focusing on reducing debtor days
- if you still need one-off finance in the future, consider something like market invoice or just a good old fashioned overdraft or some other form of revolving credit
Mean time, also consider cashflow in your customer acquisition. One of the ways I improved my position was to focus hard on attracting customers with strong balance sheets and good payment track records, and then managing them very well to get invoices paid.
And, yes, some customers think a supplier who factors is a risk to them. But most companies have some sort of financing in some way or another secured on their order book.
In my experience, factors' credit controllers are awful and can really harm customer relationships - whilst simultaneously not actually collecting quickly!
In the past, I moved from factoring to CID and set up my own credit control operation. The latter was so good that I then sold that service to others.
Re moving, why move? Why not just reduce the amount you draw down over time? Once that reaches zero, kill the deal.
Is the factoring secured on your house? If not then you're unilaterally giving up an unpledged asset for little benefit. Business can change. Your nest egg is what you're offering up here. I would caution against it.
From what little I know, I would say:
- swap to CID
- plan to over time gradually reduce drawdown, especially by focusing on reducing debtor days
- if you still need one-off finance in the future, consider something like market invoice or just a good old fashioned overdraft or some other form of revolving credit
Mean time, also consider cashflow in your customer acquisition. One of the ways I improved my position was to focus hard on attracting customers with strong balance sheets and good payment track records, and then managing them very well to get invoices paid.
And, yes, some customers think a supplier who factors is a risk to them. But most companies have some sort of financing in some way or another secured on their order book.
Done more than a few of these in my time!!
Now.. (appreciate these are quick numbers with some assumptions)
Within traditional "bank" lending rules, you could borrow roughly 60/70% of the factory, (600 @ 70% = 420k- 210k outstanding), so £210k to go in (Im assuming the business owns the factory here not you personally or an SPV/SIPP/SASS.
Again using traditional "bank" lending rules they could extend a second charge loan direct to the business on your residential home at roughly 70/75% of the property, (800k @75% = 600k - 300k) so another 300k in. However you would need to get permission from any other occupants and or owners, and of course everyone would require independent legal advice and you would almost certainly need to offer a PG to support the charge.
However this would still leave you 40k short of your lowest point.
Those types of loans/mortgages you would need to show say, 200%+ EBITDA cover from the business.
Assuming a loan granted of 510k at 6-9%,repayments would be say 4500-5000 pcm over 15 yrs!, 9/10k pcm over 5 yrs, so EBITDA of 120k + PA/ EBITDA 200k+ pa
Id assume your Invoice Finance facility (including monthly charge + factor charges) would be somewhere around 80k/100k pa + based on your turnover (ignoring any re factored charges).
But I would ask (an by no means in full!),
What do they allow you to draw on day one of invoice paid, 70/80%?
How long are your terms 30/60/90 days?, and how long does it take on average to receive full payment from the client?
If your business continues to grows how will you fund future growth?
If a client goes carillon style bust, you'll have debtor protection at present, you won't in future, could you handle a large bad debt?
What (if any PG) do you have outstanding to your current factors company?
Would as other posters have suggested slowly winding down the reliance on the facility be better?
Would the new products not sit better in another company, and perhaps they may fall under patent box or R&D tax credits?
Now.. (appreciate these are quick numbers with some assumptions)
Within traditional "bank" lending rules, you could borrow roughly 60/70% of the factory, (600 @ 70% = 420k- 210k outstanding), so £210k to go in (Im assuming the business owns the factory here not you personally or an SPV/SIPP/SASS.
Again using traditional "bank" lending rules they could extend a second charge loan direct to the business on your residential home at roughly 70/75% of the property, (800k @75% = 600k - 300k) so another 300k in. However you would need to get permission from any other occupants and or owners, and of course everyone would require independent legal advice and you would almost certainly need to offer a PG to support the charge.
However this would still leave you 40k short of your lowest point.
Those types of loans/mortgages you would need to show say, 200%+ EBITDA cover from the business.
Assuming a loan granted of 510k at 6-9%,repayments would be say 4500-5000 pcm over 15 yrs!, 9/10k pcm over 5 yrs, so EBITDA of 120k + PA/ EBITDA 200k+ pa
Id assume your Invoice Finance facility (including monthly charge + factor charges) would be somewhere around 80k/100k pa + based on your turnover (ignoring any re factored charges).
But I would ask (an by no means in full!),
What do they allow you to draw on day one of invoice paid, 70/80%?
How long are your terms 30/60/90 days?, and how long does it take on average to receive full payment from the client?
If your business continues to grows how will you fund future growth?
If a client goes carillon style bust, you'll have debtor protection at present, you won't in future, could you handle a large bad debt?
What (if any PG) do you have outstanding to your current factors company?
Would as other posters have suggested slowly winding down the reliance on the facility be better?
Would the new products not sit better in another company, and perhaps they may fall under patent box or R&D tax credits?
BjornLucky said:
Deesee thank you your information is very very helpful since so factual.
You are correct the yearly fees are 80k per year
£80k a year on a £3m turnover business?You are correct the yearly fees are 80k per year
I work in the invoice finance industry and on a CID facility you should be paying between £15-20k depending on how much you borrow, although that is without credit protection. Even with this it shouldn’t be more than £30k.
One benefit of invoice finance no-one has mentioned is that you are not having to pledge tangible security I.e bricks and mortar. At the moment you still have the 2 properties to fall back on if the company fails, presuming the business property is owned by a separate company.
If the business is still growing quickly then invoice finance may be a better option than an overdraft.
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