invoice discounting/factoring and alternatives
Discussion
one of the firms i am involved with is looking at invoice discounting and/or debt factoring. I've been asked to look into it for them, so I thought I would ask the collective for their thoughts/experiences/advice.
Debtors list is about £250k against which they want to raise some working capital. It's a pretty new company, and they dont really want to sign away any equity/debentures/director's house etc...
thanks in advance
JakeR
Debtors list is about £250k against which they want to raise some working capital. It's a pretty new company, and they dont really want to sign away any equity/debentures/director's house etc...
thanks in advance
JakeR
I am not comfortable with factoring for several reasons
1. The bank normally have fixed and floating over debtors anyway, by trying to"suggest" you go down this route they are effectively admitting they are discounting the profile e.g 90day+ or the quality
2. The credit control function needs to be done in house and never externally, the queries are only bounced back to the company anyway and then removed from the draw down.
3. The admin costs internally invariably are very high and initially hidden. e.g two bank a/c's and cash book to reconcile, postage and photocopy of invoices, telephone call interruptions- the list goes on
4. The admin charges and financing charges are also hidden (not always to be fair but certainly difficult to quantify initially) and these erode the trading margin significantly.
5. I know that the rise in factoring/inv disc etc is quite significant but from my experience its a one off capital injection that only redresses a poor bank overdraft that hides a trading loss (big assumption!)so no benefit to the business is felt in cash terms and then the admin costs drag the accounts down.
6. It can work, but by heck you have to be on the ball and if you were in the first place why won't the business stand the o/d? or a BDL? to fund w/c?
1. The bank normally have fixed and floating over debtors anyway, by trying to"suggest" you go down this route they are effectively admitting they are discounting the profile e.g 90day+ or the quality
2. The credit control function needs to be done in house and never externally, the queries are only bounced back to the company anyway and then removed from the draw down.
3. The admin costs internally invariably are very high and initially hidden. e.g two bank a/c's and cash book to reconcile, postage and photocopy of invoices, telephone call interruptions- the list goes on
4. The admin charges and financing charges are also hidden (not always to be fair but certainly difficult to quantify initially) and these erode the trading margin significantly.
5. I know that the rise in factoring/inv disc etc is quite significant but from my experience its a one off capital injection that only redresses a poor bank overdraft that hides a trading loss (big assumption!)so no benefit to the business is felt in cash terms and then the admin costs drag the accounts down.
6. It can work, but by heck you have to be on the ball and if you were in the first place why won't the business stand the o/d? or a BDL? to fund w/c?
JakeR said:
one of the firms i am involved with is looking at invoice discounting and/or debt factoring. I've been asked to look into it for them, so I thought I would ask the collective for their thoughts/experiences/advice.
Debtors list is about £250k against which they want to raise some working capital. It's a pretty new company, and they dont really want to sign away any equity/debentures/director's house etc...
thanks in advance
JakeR
Forgive me is if I have overlooked something you have not mentioned, but the first port of call for raising capital would be to chase up the debtors in the first place and then put systems in place to ensure it doesnt happen again.Debtors list is about £250k against which they want to raise some working capital. It's a pretty new company, and they dont really want to sign away any equity/debentures/director's house etc...
thanks in advance
JakeR
To be frank effective collection against the debtors list should solve the short term problems. In the long term though, rather than give say 15% margin to a bank giving a discount for early payment and following this up with a reminder will cost a lot less.
As the bank effectively makes its price up against the perceived risk, even if you can get a bank to take on the £250k and in the lost term they will look for reasons why there is £250k oustanding and facotr this into the risk estimate and the cost to you.
I would start putting pressure on the debtors personally, and failing that get an agency - of which there are couple of regular posters on here to chase any remainder.
Although the above replies have many valid points, the most salient being staying on top of your debtors, keep chasing, etc, there are sometimes valid reasons why factoring/invoice discounting may be a good idea:-
1) If the directors/shareholders have no funds (or don't want to put up security) and
2) You are in a fast growing company scenario with high value of COGS
But
You must IMO keep some fundamental rules:-
a) ensure that you don't draw down all the funds available
b) make sure that you don't draw down so much (and spend it on non short term creditors) that you technically become insolvent.
b) have a plan to 'buy' you way out of the factoring in the future
I have used (successfully) factoring in a fast growth distribution business, we only ever used the drawn down funds to pay our suppliers (several whom had strict 30 day terms) and the business running costs. All fixed assets were bought with other funds. The factoring company offered us a lower interest rate than the standard bank overdraft rate.
I used a simple formula of (Debtors (less funds drawn down)+ Cash in Bank) Must always be greater than Current Liabilities.
You also need to remember that the % taken of the invoice (Factoring Fees) includes the whole value including VAT of the invoice, and that the factor fees comes straight off your bottom line.
Having said all that a decent credit controller will get your average debtor days down and possibly will cost less than the factor fees. In my experience a good credit controller will get ave debtor days (30 day usal terms) down from something like 55-65 days to 40-45 days within a few months.
We had the option of which customers we factored, many of whom had some 'unmoveable' standard terms eg 60 days from end of month of invoice, these were people we wanted to sell to and you had to deal on their terms, here factoring (with the lower interest rate) proved useful.
Hope that helps
davidy
1) If the directors/shareholders have no funds (or don't want to put up security) and
2) You are in a fast growing company scenario with high value of COGS
But
You must IMO keep some fundamental rules:-
a) ensure that you don't draw down all the funds available
b) make sure that you don't draw down so much (and spend it on non short term creditors) that you technically become insolvent.
b) have a plan to 'buy' you way out of the factoring in the future
I have used (successfully) factoring in a fast growth distribution business, we only ever used the drawn down funds to pay our suppliers (several whom had strict 30 day terms) and the business running costs. All fixed assets were bought with other funds. The factoring company offered us a lower interest rate than the standard bank overdraft rate.
I used a simple formula of (Debtors (less funds drawn down)+ Cash in Bank) Must always be greater than Current Liabilities.
You also need to remember that the % taken of the invoice (Factoring Fees) includes the whole value including VAT of the invoice, and that the factor fees comes straight off your bottom line.
Having said all that a decent credit controller will get your average debtor days down and possibly will cost less than the factor fees. In my experience a good credit controller will get ave debtor days (30 day usal terms) down from something like 55-65 days to 40-45 days within a few months.
We had the option of which customers we factored, many of whom had some 'unmoveable' standard terms eg 60 days from end of month of invoice, these were people we wanted to sell to and you had to deal on their terms, here factoring (with the lower interest rate) proved useful.
Hope that helps
davidy
JakeR said:
I hear you... need for cash flow isnt as a result of poor repayment from debtors, it's expansion... In fact, we offer a settlement discount to customers to help cashflow... we wish more of them would take it!
I have a client in exactly the same position, their expansion (nearly £500k from nothing in 8 months) is difficult to manage, due to the way they pay and are paid.Factoring is usefull, and although at first sight appears expensive, is actually not dissimilar to running an overdraft for the amount needed to be factored (and doesn't involve putting your house on the line). Haggle with the factoring agent, they are flexible.
What i'd suggest is factor your poorer paying clients, there's no need for you to be operating all invoices through factoring if some pay quickly, be selective.
thewave said:
Tell them to come back with a sensible figure, don't be affraid to tell your bank what you expect.
yep, I'm all for haggling with the bu99ers! Can anyone throw me some figures? So far I've had:£1250 arrangement fee
£600 pcm 'admin' fee
base +2% on what we use...
on a £250k debtor list, this works out at a big chunk in my humble opinion...
JakeR said:
thewave said:
Tell them to come back with a sensible figure, don't be affraid to tell your bank what you expect.
yep, I'm all for haggling with the bu99ers! Can anyone throw me some figures? So far I've had:£1250 arrangement fee
£600 pcm 'admin' fee
base +2% on what we use...
on a £250k debtor list, this works out at a big chunk in my humble opinion...
who's that with?Have left a message for client to get back to me with figures from Barclays factoring, will let you know tomorrow.
From recent experience…..
Invoice Discounting shouldn’t really be seen as a means of credit control but more an option for cashflow management. Banks tend only to ID on good debts – we were getting IDing on invoices that the client paid in 30 days anyway so were paying a hefty rate for the sake of 10 days which for us at least, was not critical.
Whether it’s right for you depends on the business. For simple manufacturing or product sales, i.e: Purchase order > Supply > Invoice, then it can work fine. For more complex consultancy, service businesses it can be a big pain.
We’ve got out of it and manage cashflow through overdraft instead. Much easier and cheaper.
Invoice Discounting shouldn’t really be seen as a means of credit control but more an option for cashflow management. Banks tend only to ID on good debts – we were getting IDing on invoices that the client paid in 30 days anyway so were paying a hefty rate for the sake of 10 days which for us at least, was not critical.
Whether it’s right for you depends on the business. For simple manufacturing or product sales, i.e: Purchase order > Supply > Invoice, then it can work fine. For more complex consultancy, service businesses it can be a big pain.
We’ve got out of it and manage cashflow through overdraft instead. Much easier and cheaper.
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