does anyone here do Invoice factoring or use it?
Discussion
bit of background we run a small airport transfer company and like most small business cashflow is a constant struggle,
mainly due to us working for suppliers using 30,60 and 90 day terms and us paying drivers and staff weekly.
seen invoice factoring mentioned by a few people and wondering if anyone can give me a brief overview or how it actually works and ideally their experiences of using it?
mainly due to us working for suppliers using 30,60 and 90 day terms and us paying drivers and staff weekly.
seen invoice factoring mentioned by a few people and wondering if anyone can give me a brief overview or how it actually works and ideally their experiences of using it?
invoice factoring basically smooths out your cash-flow for a % cut of your invoices...
an alternative is to look at the cost of borrowing.
ultimately cash-flow issues are simply about a delay on inward payment without a corresponding delay on outward payment
If you have a cushion of cash, then you remove cash-flow issues...
so, you have £10,000 of outstanding invoices and need to pay staff bills of £5,000
if you had a cushion of £5k then you can pay from the cushion and repay the cushion from the outstanding invoices once they come in...
clearly those figures suggest a snapshot in time, whereas you need to work out correct size of cushion for the time period of your longest payers - so if they are paying on up to 90 days and you invoice £10,000 p/m you might need a cushion of up to £30,000
such a cushion could come from an overdraft facility - or a loan - or putting your own money in - or building up reserves - etc.
you could have a temporary cushion through e.g. an overdraft while you build up the reserves...
you would need to consider the cost of such a facility (actual cost of borrowing / cost of not using the money elsewhere) v. the cost of invoice factoring
bear in mind that the cost of the cushion is only against an amount needed to protect you from long term payers - whereas invoice factoring will usually take a % of all your invoices - you need to look therefore at a balance of who pays over what time - the more regular payers you have the more expensive invoice factoring is for those few who take longer to pay...
worth considering options
an alternative is to look at the cost of borrowing.
ultimately cash-flow issues are simply about a delay on inward payment without a corresponding delay on outward payment
If you have a cushion of cash, then you remove cash-flow issues...
so, you have £10,000 of outstanding invoices and need to pay staff bills of £5,000
if you had a cushion of £5k then you can pay from the cushion and repay the cushion from the outstanding invoices once they come in...
clearly those figures suggest a snapshot in time, whereas you need to work out correct size of cushion for the time period of your longest payers - so if they are paying on up to 90 days and you invoice £10,000 p/m you might need a cushion of up to £30,000
such a cushion could come from an overdraft facility - or a loan - or putting your own money in - or building up reserves - etc.
you could have a temporary cushion through e.g. an overdraft while you build up the reserves...
you would need to consider the cost of such a facility (actual cost of borrowing / cost of not using the money elsewhere) v. the cost of invoice factoring
bear in mind that the cost of the cushion is only against an amount needed to protect you from long term payers - whereas invoice factoring will usually take a % of all your invoices - you need to look therefore at a balance of who pays over what time - the more regular payers you have the more expensive invoice factoring is for those few who take longer to pay...
worth considering options
Edited by akirk on Wednesday 27th October 10:59
Don’t do it as it will cost you about 20% plus a lot of admin. A friend of mine bought into a similar business that was factoring he never understood the exact charges and could never get out of it.
I then merged that business with mine and we don’t factor.
Although your owed that money until the client paid your not out of pocket as you pay your tax 9 months after your year end and therefore treat it as tax money
The private hire businesses mark up isn’t enough to pay those kind of fees.
I then merged that business with mine and we don’t factor.
Although your owed that money until the client paid your not out of pocket as you pay your tax 9 months after your year end and therefore treat it as tax money
The private hire businesses mark up isn’t enough to pay those kind of fees.
A number of years ago we used invoice financing, we started as we were spending our time as owners chasing debts and collecting money, we were growing very quickly and being constrained by the existing methods of finance so were advised to consider factoring and moving away from an overdraft.
It did a job, it freed up a lot of our time but there were some issues and it did actually harm our cashflow signiicantly at one point, to the point we could easily have gone under. The main issues were
We have a variety of clients some corporates but also some smaller companies, with the newer smaller companies that wouldn't have a great credit rating we could only get finance that covered one months invoicing, obviously 30 days later you raise another invoice but can't get any finance - defeats the object of invoice financing.
We could only finance up to 20% of book debt with one company so if you do have a large client you could find yourself unable to finance the invoice. Likewise if you have a bad payer you can have the amount you can finance reduced.
Out debtor days went from around 50 days to 90 days as we left it entirely up to the factoring company, this obviously hurts cashflow as after a 90 day debt they take the money back off you. Always stay in control of this yourself and ensure you work with the factoring company.
It was quite expensive.
On the whole it did a job, it freed up some cash and helped us grow but we should have managed the whole process more and been more aware of what they would finance.
I would never go back and use it again as it is also very difficult to get out of.
It did a job, it freed up a lot of our time but there were some issues and it did actually harm our cashflow signiicantly at one point, to the point we could easily have gone under. The main issues were
We have a variety of clients some corporates but also some smaller companies, with the newer smaller companies that wouldn't have a great credit rating we could only get finance that covered one months invoicing, obviously 30 days later you raise another invoice but can't get any finance - defeats the object of invoice financing.
We could only finance up to 20% of book debt with one company so if you do have a large client you could find yourself unable to finance the invoice. Likewise if you have a bad payer you can have the amount you can finance reduced.
Out debtor days went from around 50 days to 90 days as we left it entirely up to the factoring company, this obviously hurts cashflow as after a 90 day debt they take the money back off you. Always stay in control of this yourself and ensure you work with the factoring company.
It was quite expensive.
On the whole it did a job, it freed up some cash and helped us grow but we should have managed the whole process more and been more aware of what they would finance.
I would never go back and use it again as it is also very difficult to get out of.
Audicab said:
A number of years ago we used invoice financing, we started as we were spending our time as owners chasing debts and collecting money, we were growing very quickly and being constrained by the existing methods of finance so were advised to consider factoring and moving away from an overdraft.
It did a job, it freed up a lot of our time but there were some issues and it did actually harm our cashflow signiicantly at one point, to the point we could easily have gone under. The main issues were
We have a variety of clients some corporates but also some smaller companies, with the newer smaller companies that wouldn't have a great credit rating we could only get finance that covered one months invoicing, obviously 30 days later you raise another invoice but can't get any finance - defeats the object of invoice financing.
We could only finance up to 20% of book debt with one company so if you do have a large client you could find yourself unable to finance the invoice. Likewise if you have a bad payer you can have the amount you can finance reduced.
Out debtor days went from around 50 days to 90 days as we left it entirely up to the factoring company, this obviously hurts cashflow as after a 90 day debt they take the money back off you. Always stay in control of this yourself and ensure you work with the factoring company.
It was quite expensive.
On the whole it did a job, it freed up some cash and helped us grow but we should have managed the whole process more and been more aware of what they would finance.
I would never go back and use it again as it is also very difficult to get out of.
Agree on most of the above. I’ve had both factoring (where you disclose to the client that the invoice has been “sold”) and confidential invoice discounting (CID; where the factor has a first charge on the invoice debts but your clients don’t know).It did a job, it freed up a lot of our time but there were some issues and it did actually harm our cashflow signiicantly at one point, to the point we could easily have gone under. The main issues were
We have a variety of clients some corporates but also some smaller companies, with the newer smaller companies that wouldn't have a great credit rating we could only get finance that covered one months invoicing, obviously 30 days later you raise another invoice but can't get any finance - defeats the object of invoice financing.
We could only finance up to 20% of book debt with one company so if you do have a large client you could find yourself unable to finance the invoice. Likewise if you have a bad payer you can have the amount you can finance reduced.
Out debtor days went from around 50 days to 90 days as we left it entirely up to the factoring company, this obviously hurts cashflow as after a 90 day debt they take the money back off you. Always stay in control of this yourself and ensure you work with the factoring company.
It was quite expensive.
On the whole it did a job, it freed up some cash and helped us grow but we should have managed the whole process more and been more aware of what they would finance.
I would never go back and use it again as it is also very difficult to get out of.
You can end up running your business to suit the characteristics of the funding
Never let the factor do credit control. They’re all rubbish at it, and they’re financially incentivised (interest) to collect slowly!
If you don’t have time to do credit control then sub it out. It is an art. I can recommend somebody who specialises in that area if you like. Negotiate the game factoring charges to exclude credit control.
Factors want all your invoices, even the quick paying stuff. So you pay a % fee on everything.
Credit limits are a huge game. I’ve beauty parades in the past - given various potential factors my client list and asked them for credit limits on them all. Each factor uses a different algorithm.
That said, the credit limits in my experience are strongly influenced by net tangible assets - service companies can be a problem.
Look at the difference between recourse and non-recourse factoring depending upon your appetite for risk.
If you have a few big customers, consider something like Market Invoice - you can sell just a few invoices not your whole book.
Typing on a phone so can’t really write more, but happy to answer any questions. I was doing about £1 million a year through factors at one point. It really helped us to grow fast, but it definitely has its downsides!
First of all, full disclosure I work in the invoice finance industry, and all the above raise some really good points about the pros and cons of IF. Happy to disclose who I work for but not sure if that is ok with mods?
Cost is a major factor, and you really need to make sure that the costs of invoice finance will be covered by any extra profit you make. It’s not right for all businesses and the finance market has changed a lot in the last few years, and there are far more options out there both in invoice finance and other forms of funding.
Do you get sign off for the work you do? This is a requirement for most invoice finance providers.
Take a look at any hidden costs, e.g. charges for same day or chaps payments, as these can really mount up. Any invoice finance provider should be able to tell you all their charges outside of service charge, interest rate and arrangement fees. Typically for a £1m turnover business inc. VAT you should be paying no more than £10k a year and possibly a lot less.
Any questions, will try my best to answer.
Cost is a major factor, and you really need to make sure that the costs of invoice finance will be covered by any extra profit you make. It’s not right for all businesses and the finance market has changed a lot in the last few years, and there are far more options out there both in invoice finance and other forms of funding.
Do you get sign off for the work you do? This is a requirement for most invoice finance providers.
Take a look at any hidden costs, e.g. charges for same day or chaps payments, as these can really mount up. Any invoice finance provider should be able to tell you all their charges outside of service charge, interest rate and arrangement fees. Typically for a £1m turnover business inc. VAT you should be paying no more than £10k a year and possibly a lot less.
Any questions, will try my best to answer.
I took on a Factoring facility about 6 months ago and I don't believe it was the best option for me.
Reason I did it was we're growing fast and some months of high growth can put a strain on cash flow so to relieve the head ache of worrying about it I took on Factoring.
I haven't actually borrowed into it yet although obviously I'm still paying a fair amount in fees.
Biggest draw backs are the amount of hours that go in to managing it, I.e loading our invoices on to it and managing everything on it. You then also have a longer delay in getting the money to your bank as it takes about 3 days for factor company (high street bank) to process the payment in and then 3 days for the money to hit your bank once you've requested it.
They also contact your customers to confirm they owe you the money which can be quite intrusive.
The way they take fees is also madness. They don't take there fee in one sum at end of month, rather than this they deduct a small amount from each payment in, trying to check it's correct is just impossible.
My best option in hindsight should of been a 20k loan, popped in to a savings account which simply pays its own repayments and topped up to pay the interest , this would of been around half the cost of Factoring.
I think I'm about to give the Factoring up as I agreed to be able to give 1 months notice to quit although this is going to be abit of hassle switching everything back again.
Good luck what ever you choose
Reason I did it was we're growing fast and some months of high growth can put a strain on cash flow so to relieve the head ache of worrying about it I took on Factoring.
I haven't actually borrowed into it yet although obviously I'm still paying a fair amount in fees.
Biggest draw backs are the amount of hours that go in to managing it, I.e loading our invoices on to it and managing everything on it. You then also have a longer delay in getting the money to your bank as it takes about 3 days for factor company (high street bank) to process the payment in and then 3 days for the money to hit your bank once you've requested it.
They also contact your customers to confirm they owe you the money which can be quite intrusive.
The way they take fees is also madness. They don't take there fee in one sum at end of month, rather than this they deduct a small amount from each payment in, trying to check it's correct is just impossible.
My best option in hindsight should of been a 20k loan, popped in to a savings account which simply pays its own repayments and topped up to pay the interest , this would of been around half the cost of Factoring.
I think I'm about to give the Factoring up as I agreed to be able to give 1 months notice to quit although this is going to be abit of hassle switching everything back again.
Good luck what ever you choose
As Akirk says it doesn’t suit everyone and if you can avoid it then do so.
One way is to finance your own factoring either with a company loan or directors injection. Run a savings account as a pool and pull from it when you raise an invoice then replenish once paid - just need to be disciplined.
One way is to finance your own factoring either with a company loan or directors injection. Run a savings account as a pool and pull from it when you raise an invoice then replenish once paid - just need to be disciplined.
I've found small early settlement discounts work extraordinarily well as they give finance directors a very good reaon to pay you early. It also gives you an early indication if theres a problem in a customer as if they have always taken advantage of the small early settlement discount the day they don't is the day you know they have cash flow problems.
Cheers,
Tony
Cheers,
Tony
KrissKross said:
I had done it for many years, its an admin nightmare and costs a fortune. They all promise to help you but never do.
You are better off putting people on proforma, or offering an extra discount if they pay upfront, some people will moan but if you have what they want they will pay.
This 100%. With our poor paying clients we have simply increased our rates to factor in the extra risk. We're honest with them about this and let them know that we could provide our service at a better rate if they agreed to pay within 30 days. They choose not to though, so they pay more.You are better off putting people on proforma, or offering an extra discount if they pay upfront, some people will moan but if you have what they want they will pay.
The other thing you could seek to do with your regular customers is to get them onto some sort of monthly retainer - i.e. they pay for a certain number of pre-agreed transfers by regular monthly invoice. These transfers are at a slightly lower rate to that which you are currently charging. Any additions are reconciled at the end of each month. This should smooth out your cashflow a lot and they get their transfers at a reduced rate, win-win.
Another user against IF here too.
Unfortunately a business I recently started with uses it.
Check and double check their costs:
Initial Start-up costs
Increase limit charges.
Monthly interest charges
Monthly maintenance fees.
Also check how much of your debtors book they are willing to fund... this could be anything from 75% up... it's never usually 100% and any aged debt and intercompany debt will be taken out too.
If you are struggling with bad debt now, I don't think IF will help in the short term due to that.
What is your credit control procedures like at present? do you have someone actively maintaining this and chasing money owed?
Do you have a local law firm you use to escalate the debt?
There is a fair amount of admin work, constant admin work to keep IF up to date and to keep the provider happy.
Just today/tomorrow I’ve got the monthly IF reconciliation AND the bank's IF audit of our invoices etc.
I'm sure IF can work for some, but I've been thrown in to 3 businesses where it's been nothing short of a nightmare.
Unfortunately a business I recently started with uses it.
Check and double check their costs:
Initial Start-up costs
Increase limit charges.
Monthly interest charges
Monthly maintenance fees.
Also check how much of your debtors book they are willing to fund... this could be anything from 75% up... it's never usually 100% and any aged debt and intercompany debt will be taken out too.
If you are struggling with bad debt now, I don't think IF will help in the short term due to that.
What is your credit control procedures like at present? do you have someone actively maintaining this and chasing money owed?
Do you have a local law firm you use to escalate the debt?
There is a fair amount of admin work, constant admin work to keep IF up to date and to keep the provider happy.
Just today/tomorrow I’ve got the monthly IF reconciliation AND the bank's IF audit of our invoices etc.
I'm sure IF can work for some, but I've been thrown in to 3 businesses where it's been nothing short of a nightmare.
Do not sit back and think that the money will still come rolling in, you have to keep up your credit control! I relaxed this for a couple of months when i saw 90% of my invoicing come into my account straight away, I'm sure my customers' accounts depts relaxed my payment terms as I wasn't on the phones pestering for payment dates as frequently and this ate into g.p at the end of the day
Edited by topsey.mod on Saturday 25th January 09:20
A contact of mine from another forum sent me a link to this thread and I thought that I would offer up a few comments.
Firstly some of the comments about costs are widely out. It's a very competitive market out there so pencils are constantly being sharpened and claims of costs at 20% are well wide of the mark.
As an example one of the major factoring companies offers a facility to smaller companies where they will advance up to 90% of invoice values at an all in cost of between 3% and 4% with no interest charges. The client will continue with their own credit control which will suit many people.
There are huge variations in different factors ability at credit control but it's not true to say that they have a vested interest in not collecting debts as not only do they not make much of a turn on interest but the biggest danger to every factor is client fraud and the longer invoices are left outstanding the larger any potential fraud could be and so every factoring company will happily trade off extra interest for the greater financial security of a lower exposure to risk
Ian
Firstly some of the comments about costs are widely out. It's a very competitive market out there so pencils are constantly being sharpened and claims of costs at 20% are well wide of the mark.
As an example one of the major factoring companies offers a facility to smaller companies where they will advance up to 90% of invoice values at an all in cost of between 3% and 4% with no interest charges. The client will continue with their own credit control which will suit many people.
There are huge variations in different factors ability at credit control but it's not true to say that they have a vested interest in not collecting debts as not only do they not make much of a turn on interest but the biggest danger to every factor is client fraud and the longer invoices are left outstanding the larger any potential fraud could be and so every factoring company will happily trade off extra interest for the greater financial security of a lower exposure to risk
Ian
I run a taxi company and looked onto this for the very reason the OP is.
In the end I decided against it. Not because of the costs so much, although you don't get to choose which invoices you factor, it's all of one client or not at all. A lot of my contracts are with a copper bottomed client, the local council, every factoring company wanted me to sign up, but I could only factor all the council invoices or none of them. I didn't want this. Plus I was going to be tied up for a minimum of three months rolling contract at best, twelve months at worst.
For the costs involved, it's really not worth it unless you are turning over hundreds of thousands, and only then if you have a very tight reign on your finances and know exactly what you are doing and why. Otherwise it won't end well.
OP, the easiest thing to do would be to move your drivers to monthly paid, which is what I did. Keeps things much simpler. It is better to change things internally to free up cash flow than to use a factoring company.
In the end I decided against it. Not because of the costs so much, although you don't get to choose which invoices you factor, it's all of one client or not at all. A lot of my contracts are with a copper bottomed client, the local council, every factoring company wanted me to sign up, but I could only factor all the council invoices or none of them. I didn't want this. Plus I was going to be tied up for a minimum of three months rolling contract at best, twelve months at worst.
For the costs involved, it's really not worth it unless you are turning over hundreds of thousands, and only then if you have a very tight reign on your finances and know exactly what you are doing and why. Otherwise it won't end well.
OP, the easiest thing to do would be to move your drivers to monthly paid, which is what I did. Keeps things much simpler. It is better to change things internally to free up cash flow than to use a factoring company.
Factoring Man said:
A contact of mine from another forum sent me a link to this thread and I thought that I would offer up a few comments.
Firstly some of the comments about costs are widely out. It's a very competitive market out there so pencils are constantly being sharpened and claims of costs at 20% are well wide of the mark.
As an example one of the major factoring companies offers a facility to smaller companies where they will advance up to 90% of invoice values at an all in cost of between 3% and 4% with no interest charges. The client will continue with their own credit control which will suit many people.
There are huge variations in different factors ability at credit control but it's not true to say that they have a vested interest in not collecting debts as not only do they not make much of a turn on interest but the biggest danger to every factor is client fraud and the longer invoices are left outstanding the larger any potential fraud could be and so every factoring company will happily trade off extra interest for the greater financial security of a lower exposure to risk
Ian
Just so I understand, if I had a £10,000 invoice, under this model I could factor 90% (£9,000) for which I would receive £8685 assuming a 3.5% charge. The £1k I assume I receive when the invoice is paid. If the invoice is on 30 day terms but paid after 60 (ie the factoring advances the payment by 30 days), aren't I effectively paying over 40% interest plus fees or will the factoring company pay immediately? Even assuming they pay on 7 days, I'm still paying around 25% interest. As DSLiverpool notes, better to borrow from someone like funding circle and run a sinking fund?Firstly some of the comments about costs are widely out. It's a very competitive market out there so pencils are constantly being sharpened and claims of costs at 20% are well wide of the mark.
As an example one of the major factoring companies offers a facility to smaller companies where they will advance up to 90% of invoice values at an all in cost of between 3% and 4% with no interest charges. The client will continue with their own credit control which will suit many people.
There are huge variations in different factors ability at credit control but it's not true to say that they have a vested interest in not collecting debts as not only do they not make much of a turn on interest but the biggest danger to every factor is client fraud and the longer invoices are left outstanding the larger any potential fraud could be and so every factoring company will happily trade off extra interest for the greater financial security of a lower exposure to risk
Ian
williaa68 said:
Just so I understand, if I had a £10,000 invoice, under this model I could factor 90% (£9,000) for which I would receive £8685 assuming a 3.5% charge. The £1k I assume I receive when the invoice is paid. If the invoice is on 30 day terms but paid after 60 (ie the factoring advances the payment by 30 days), aren't I effectively paying over 40% interest plus fees or will the factoring company pay immediately? Even assuming they pay on 7 days, I'm still paying around 25% interest. As DSLiverpool notes, better to borrow from someone like funding circle and run a sinking fund?
£10k + VAT = £12k. Borrow 90% (£10.8k), less fee (3.5% = £420), net £10.38k. If paid on 60 days, you've got 60 days' credit, which has cost you (assuming no additional interest) £420. That's 4.04% for 2 months, which is 2% per month.You don't have to take the full 90%, but if the factors' charges are more fee than interest then you might as well.
Many companies will offer 2-5% or even more discount for early payment, so it is comparable to that.
It also helps you if you're growing or have unpredictable workload, especially if using suppliers / subbies - you can use the factoring to pay the outgoings before the client pays you.
But for a "steady state" business other funding might be more appropriate.
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