Invoice factoring
Discussion
I’ve been offered a chance to buy into another business which looks like a winner in the long term. The only problem is that its not very cash rich. The margins are right but from time of invoice to payment is really hurting the company they are getting roasted by back charges from the VAT due to late payments.
I know the theoretical workings of invoice factoring but what are the costs involved? My next question being how do they manage the debt?
Any possible leads or advice greatly received.
Factoring is OK if you don't mind a good slice of your margin being lopped off (think 15%) and you put up some security (think house). I agree with Eric, pay VAT on the invoices paid, not when they have been sent or some other cleaver revenue recognition scheme and the problem goes away.
Factoring should be used instead of an overdraft - not as well as. Its effectiveness depends upon the type of business and the factoring companies are getting increasingly tetchy over the issue of purchase invoices etc. If you part invoice for work or have multi-faceted service contracts then forget it. If it's a simple case of order-supply-invoice, then may be worth it.
Generally you wouldn't need to put up security as the the debt is secured against the book debts. Factoring, its usally about 5-10%, Factor in credit control, and credit protection and you may be looking at nearer 15%, depends on turnover and who you go with.
Yes it can cost a fair bit, but the company can chase your debts for you, or you can do it yourself, most companies allow you to tailor how they chase each of your customers. Some suppliers will offer credit protection (ie, if the debt goes past X days, they will pay the invoice)
As for how your customers will react, they may well never know, you chose confidential or non-confidential factoring. Some of your suppliers may even factor your invoices without you knowing. There really isn't the stigma attached to it there used to be. However people fail to see the how much money and more importantly time it can save them, and just look at the cost and the historical view of it.
Banks tend to be a bit more competitive than the independent suppliers in my experience, but shop around. Whoever you go with its usually a minimum 12 month contract.
Yes it can cost a fair bit, but the company can chase your debts for you, or you can do it yourself, most companies allow you to tailor how they chase each of your customers. Some suppliers will offer credit protection (ie, if the debt goes past X days, they will pay the invoice)
As for how your customers will react, they may well never know, you chose confidential or non-confidential factoring. Some of your suppliers may even factor your invoices without you knowing. There really isn't the stigma attached to it there used to be. However people fail to see the how much money and more importantly time it can save them, and just look at the cost and the historical view of it.
Banks tend to be a bit more competitive than the independent suppliers in my experience, but shop around. Whoever you go with its usually a minimum 12 month contract.
coyft said:
Could your investment in the business be used to improve the cashflow, negating the need for factoring?
Thinking about it, if it were me and buying into a cash poor business, asking the question about factoring would be a first step to protect my investment!My advice to the OP would depend on the exact nature of business. The cost of the factoring service increases as the perceived risk level increases, so unfortunately there is no 'great deal'. If it is difficult for you to get paid on time, then it is still going to cost you.
One factor I would say is worth thinking about is the manpower, cashflow and credit cost implications.
For example, under the old system if you expand you may need a full time employee just for credit control and chasing people. Factoring has just saved you £20k on the total cost of an employee. If you would constantly be in the red in an overdraft, then this is interest bearing as well - maybe a few more thousand saved there too.
Finally, you can avoid or at least seriously lessen the damage which may be caused by cashflow issues. If you can't buy stock or pay staff because of your credit controller isn't doing their job or you are let down by 2 or three major suppliers then this could literally ruin your credibility to customers and staff.
coyft said:
JustinP1 said:
coyft said:
Could your investment in the business be used to improve the cashflow, negating the need for factoring?
Thinking about it, if it were me and buying into a cash poor business, asking the question about factoring would be a first step to protect my investment!The ability to generate cash to pay your creditors as they fall due is a fundamental requirement to operating a successful business. This involves only extending credit to those you have good reason to believe will pay you back within your credit terms. If you have to rely on factoring your invoices to pay the VAT man then you are doing something wrong.
Factoring should be used where you can use the money to fund additional sales and therefore increase profitability.
Try talking to a company like Javelin Wholesale or if it is payroll that's causing the concern, try JES Payroll
I would strongly advise against it, if you can avoid it then do.
We recently bought a business that was using the factoring system, and was costing them 10k a year, we looked at their customers and from our expereince, we knew that they paid within 30 days anyway!.. The guy we bought the business from, admitted it was a lazy thing for him to do.
We recently bought a business that was using the factoring system, and was costing them 10k a year, we looked at their customers and from our expereince, we knew that they paid within 30 days anyway!.. The guy we bought the business from, admitted it was a lazy thing for him to do.
Thanks to everyone that took the time out to respond.
I’ve got a meeting with the management team on Fri. I'll bee looking for some answers to one or two questions before I can make, what I believe, the right call on this one.
Initially I had thought that it was simply a fact that the firm was not profitable however as said the numbers look right.
The firm is a service provider hence the biggest overhead they have is payroll, transport and finally operational costs, with the exception of payroll, which don’t really amount to much in the scheme of things.
The firm looks to have started off with next to nothing so I can understand that this has had an impact on it however they have been trading for 4 years and it has had small cash injections made in the last 2 years by directors. I think without being to damming of the team that they perhaps had a slightly wrong approach to things. They were reluctant to approach the main provider, 95% of total works done through one of two companies’ in the same group, and instigate charging interest on overdue invoices or alternatively look at discount invoicing. This was mirrored by their caution when I loosely suggested invoice factoring as a possible solution. The main concerns being just how would it sit with the client?
Am I being idealistic or simplistic in thinking that if the above measures are needed to simply allow the firm to continue trading, which is the way I see it, then the client should either incur the cost, by means of interest, or face the consequences of either a stronger credit control system or third parties actively casing said moneys. Once again it looks like the big firms, in this case a multinational regarded as the largest British based company in its sector by some margin, quoting law and order.
I’ve got a meeting with the management team on Fri. I'll bee looking for some answers to one or two questions before I can make, what I believe, the right call on this one.
Initially I had thought that it was simply a fact that the firm was not profitable however as said the numbers look right.
The firm is a service provider hence the biggest overhead they have is payroll, transport and finally operational costs, with the exception of payroll, which don’t really amount to much in the scheme of things.
The firm looks to have started off with next to nothing so I can understand that this has had an impact on it however they have been trading for 4 years and it has had small cash injections made in the last 2 years by directors. I think without being to damming of the team that they perhaps had a slightly wrong approach to things. They were reluctant to approach the main provider, 95% of total works done through one of two companies’ in the same group, and instigate charging interest on overdue invoices or alternatively look at discount invoicing. This was mirrored by their caution when I loosely suggested invoice factoring as a possible solution. The main concerns being just how would it sit with the client?
Am I being idealistic or simplistic in thinking that if the above measures are needed to simply allow the firm to continue trading, which is the way I see it, then the client should either incur the cost, by means of interest, or face the consequences of either a stronger credit control system or third parties actively casing said moneys. Once again it looks like the big firms, in this case a multinational regarded as the largest British based company in its sector by some margin, quoting law and order.
In which case factoring will be a very expensive way of doing something simple.
All you need is for those two companies to pay you on time. All you would need to do would be to change your terms of business to let those companies know that you are now offering a 10% or even 15% early payment discount.
Of course, all you do is increase your 'standard rate' and then discount it down. A week before the invoice is due to go more expensive a quick courtesy call to remind them should do the trick.
Alternatively, should they be that big they are not arsed to pay on time, you have instantly increased turnover by 10 or 15% which if you can get access to credit at a reasonable rate should equate to nigh on the same amount as pure additional profit.
All you need is for those two companies to pay you on time. All you would need to do would be to change your terms of business to let those companies know that you are now offering a 10% or even 15% early payment discount.
Of course, all you do is increase your 'standard rate' and then discount it down. A week before the invoice is due to go more expensive a quick courtesy call to remind them should do the trick.
Alternatively, should they be that big they are not arsed to pay on time, you have instantly increased turnover by 10 or 15% which if you can get access to credit at a reasonable rate should equate to nigh on the same amount as pure additional profit.
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