Factoring Companies - in trouble?

[donz29]

With most sectors being hit by the credit crunch and resistance to lend has anyone got any knoweledge of the current state of play for smaller factoring companies ability to secure funds to lend to their clients?

[DonnyMac]

I had a client recently blame a factoring co for not releasing payment – I have no idea which factor it was – this may well have been a stalling statement though as they owed us a fair amount, which they subsequent paid saying the factor had finally released funds.
Not much help, sorry.

[skwdenyer]

DonnyMac said:

I had a client recently blame a factoring co for not releasing payment – I have no idea which factor it was – this may well have been a stalling statement though as they owed us a fair amount, which they subsequent paid saying the factor had finally released funds.
Not much help, sorry.

Most factoring will be secured by credit insurance. Credit insurers are becoming very picky about who they will insure, and very stringent in how they apply their rules.

Some practical examples, from one of my businesses which uses a factoring company.

Debt concentration rules being rigidly enforced. Any 1 client will only be factored to 50% of the total ledger size. If they are at all overdue, that drops immediately to only 20% of the total ledger size. So from one day to the next you can lose all of your available funds until said client makes a payment.

Credit insurance limits not being renewed, or being reduced. Any money already factored will immediately become "unapproved", meaning that it is immediately removed from your "availability". That may mean you can draw no more money until more client invoices are paid or you've factored more invoices.

Credit insurance limits not available to risks previously covered. I've just had to "sack" one of my longest-running clients because the business changed hands and the new owner, although they would have been seen as a good risk 12 months, does not meet the current criteria. So I can't get funding for the turnover and, more importantly, I can't get insurance for the debt. I'm not prepared to "trust" them for that much money, so that's the end of that. The credit decision was given on a Wednesday, and I'd closed the account down by Friday after 9 years, just as they were starting to up their orders!

Any adverse information about your company is being followed-up on very quickly. So if you're late filing your annual return, you could find your credit reduced. Also collection rates are being watched very carefully right now - how much money is collected from clients each month. If you have a bad couple of months of collections (clients paying later) then you could see your "advance rate" (the percentage of each invoice which is factored) being reduced without warning.

Disputes, of course, become increasingly common in poorer economic climes - your client tells the factor s/he hasn't received your invoice, or isn't sure they're going to pay, or whatever; the factor immediately puts that invoice into "unapproved" until the "dispute" is resolved, which can take a long time whilst, all the while, you're short on cash.

So there are many ways in which factors can "not release payments" when in reality they are just stringently applying the rules which have always been there, as quickly as they're entitled to. This can very often catch out those who use factors but who have never really thought through how this might not work to their advantage.

Right now I haven't heard any provable suggestions that factors themselves are running short of money. In fact quite the contrary, as the quality of the debt tends to be very high.

[donz29]

Thanks for the comments guys.