Invoice Factoring, New Business
Discussion
Eric Mc said:
Why do you think you need to use factoring for collection of your debts?
I'd say it was for cashflow not debt collection. Go to a debt collector for debt collection, go to a factoring company if you require assistance with cashflow. IMHO etremely useful for new businesses who are yet to establish working capital requirements via standard invoice payment terms (which can be 60 days if dealing with a large corporate)I always look on factoring as a bit expensive as an initial course of action. What about just ensuring you have decent overdraft limits agreed with your bank rather than going down the factoring route?
One area where factoring really causes problems is internal control of debts.
Because of the mechanics of how it works, your debts aren't actually cleared automatically when the money is forwarded to you by the lender. If you are running a standard double entry debtors ledger system (such as on Sage or Quickbooks) it can be extremely difficult and time consuming to work out who has actually paid and how much.
One area where factoring really causes problems is internal control of debts.
Because of the mechanics of how it works, your debts aren't actually cleared automatically when the money is forwarded to you by the lender. If you are running a standard double entry debtors ledger system (such as on Sage or Quickbooks) it can be extremely difficult and time consuming to work out who has actually paid and how much.
As has been said, I would not immediately use this in the first instance.
The problem is that for the service you get charged a lot. The cost is relative to what they think the risk is. They usually work this out from your past history of collecting debts. Therefore it is likely you will be put in the highest 'cost' band, that may be 15% or more.
Do you have any access to finance? For example, if you are a sole trader and therefor responsible for debts should it go wrong anyway, could you get a business overdraft with property as security?
The second option is to start small. Is there a particular reason where why you couldnt start with you as the sole employee, or with one other? Could you start from home? Could you get stock etc on 30 day or 60 day terms? Could you use a personal credit card to assist with this giving you access to free credit?
The problem is that for the service you get charged a lot. The cost is relative to what they think the risk is. They usually work this out from your past history of collecting debts. Therefore it is likely you will be put in the highest 'cost' band, that may be 15% or more.
Do you have any access to finance? For example, if you are a sole trader and therefor responsible for debts should it go wrong anyway, could you get a business overdraft with property as security?
The second option is to start small. Is there a particular reason where why you couldnt start with you as the sole employee, or with one other? Could you start from home? Could you get stock etc on 30 day or 60 day terms? Could you use a personal credit card to assist with this giving you access to free credit?
guys you need to re-read why he needs this, its to pay his staff bills so therefore getting 60 days credit on "supplies" isn't going to help if hes a primarily HR based business.
You need to speak to your banks commercial finance department first, LloydsTSB have a very good setup for invoice and sales discounting for new businesses with no trading record.
We have the same problem you do in that we work for primarily big blue chips on 60 and 90 day accounts with staff and subcontractors on 14 days payments, our cash throughput can be phenomenal as a result, despite what the others have said i would disagree that an overdraft is your best solution, principally because its almost impossible to secure a decent overdraft in the current bank credit squeeze, you will certainly have to put up security and it will be expensive.
Rather than factoring out the invoices look to discount your sales, i.e secure finance against the value of those sales, it works in a similar way to a overdraft in that they lend against the value of your invoices rather than a generic overdraft so its slightly less risky for the bank especially if you have good credit control procedures.
I would advise the following, don't offer any customers credit as standard. make your standard payment terms 7 days from invoice. if they want 30,60 or 90 days then require they submit to credit control procedures and a "formalised" credit agreement, in this case you should or have a 3rd party such as your bank determine the credit worthiness of the business and then set a strict credit limit on them. if you put this in place you should be able to get a debt recovery insurance and bad debt insurance at a reasonable rate, it should also cut your sales financing down to about 2 percent or so of the total outstanding per month which you should negotiate to pass on to your customers if they want credit provision, after all there is no such thing as free credit - someone always pays.
You need to factor these expenses into your margins, not just do as a lot of people do and say "its too expensive don't do it". whether you discount your invoices, use overdraft or use your own cash then ultimately it costs you money and using overdraft or your own cash to cover your clients debts is no substitute for tight credit controls.
Given the current credit climate even big PLC's are having their credit arrangements tightened, a lot of companies may be at risk of going under due to poor cashflow management, we went through a formal review with our bank and accountants involvement to insure we reduce our risks and you need to look at all the options with professionals and not just rely on forum opinion, cashflow is the lifeblood of your business and too important not to make a formal plan on.
If you make your terms clear to your customers it shouldn't impact sales, if it does then its possible those sales are more trouble than they work since these arrangements only affect bad payers.
remember, as a business other businesses such as vodafone won't offer you services without formally credit checking you and locking you into a credit contract, therefore there is no real place in the modern marketplace for old fashioned "gentlemens terms" and if your customers want credit then its logical that you get a 3rd party to fund that credit and pass on the cost.
You need to speak to your banks commercial finance department first, LloydsTSB have a very good setup for invoice and sales discounting for new businesses with no trading record.
We have the same problem you do in that we work for primarily big blue chips on 60 and 90 day accounts with staff and subcontractors on 14 days payments, our cash throughput can be phenomenal as a result, despite what the others have said i would disagree that an overdraft is your best solution, principally because its almost impossible to secure a decent overdraft in the current bank credit squeeze, you will certainly have to put up security and it will be expensive.
Rather than factoring out the invoices look to discount your sales, i.e secure finance against the value of those sales, it works in a similar way to a overdraft in that they lend against the value of your invoices rather than a generic overdraft so its slightly less risky for the bank especially if you have good credit control procedures.
I would advise the following, don't offer any customers credit as standard. make your standard payment terms 7 days from invoice. if they want 30,60 or 90 days then require they submit to credit control procedures and a "formalised" credit agreement, in this case you should or have a 3rd party such as your bank determine the credit worthiness of the business and then set a strict credit limit on them. if you put this in place you should be able to get a debt recovery insurance and bad debt insurance at a reasonable rate, it should also cut your sales financing down to about 2 percent or so of the total outstanding per month which you should negotiate to pass on to your customers if they want credit provision, after all there is no such thing as free credit - someone always pays.
You need to factor these expenses into your margins, not just do as a lot of people do and say "its too expensive don't do it". whether you discount your invoices, use overdraft or use your own cash then ultimately it costs you money and using overdraft or your own cash to cover your clients debts is no substitute for tight credit controls.
Given the current credit climate even big PLC's are having their credit arrangements tightened, a lot of companies may be at risk of going under due to poor cashflow management, we went through a formal review with our bank and accountants involvement to insure we reduce our risks and you need to look at all the options with professionals and not just rely on forum opinion, cashflow is the lifeblood of your business and too important not to make a formal plan on.
If you make your terms clear to your customers it shouldn't impact sales, if it does then its possible those sales are more trouble than they work since these arrangements only affect bad payers.
remember, as a business other businesses such as vodafone won't offer you services without formally credit checking you and locking you into a credit contract, therefore there is no real place in the modern marketplace for old fashioned "gentlemens terms" and if your customers want credit then its logical that you get a 3rd party to fund that credit and pass on the cost.
as a second note, some of the replies confuse "factoring" as being used to collect the debts, this isn't always the case and the 2 shouldn't be tied.
Sales discounting allows you to raise funds against the value of unpaid invoices. ie you get the money on day 1 even if the customer pays on day 90, you usually pay a percentage of the balance per month, its a more flexible system than a overdraft since you only borrow what you need, whereas shops can usually do it the otherway round, get a 90 day account for supplies and get the money up front if you deal in human resources eg contract staff then usually they do the work, you pay them then have to wait to get paid.
most bank "invoice financing" allows you to keep collecting debts inhouse or give them to a third party, all they are doing is lending you cash against your invoice book so it shouldnt cause you any accounts problems.
Sales discounting allows you to raise funds against the value of unpaid invoices. ie you get the money on day 1 even if the customer pays on day 90, you usually pay a percentage of the balance per month, its a more flexible system than a overdraft since you only borrow what you need, whereas shops can usually do it the otherway round, get a 90 day account for supplies and get the money up front if you deal in human resources eg contract staff then usually they do the work, you pay them then have to wait to get paid.
most bank "invoice financing" allows you to keep collecting debts inhouse or give them to a third party, all they are doing is lending you cash against your invoice book so it shouldnt cause you any accounts problems.
We have used invoice financing for the past year, we started as we were spending of our time as owners chasing debts and collecting money and 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 has done a job, it freed up a lot of our time but there have been some issues and it did actually harm our cashflow at one point. The main issues have been
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.
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.
As Eric said it is very difficult to show in your accounts where you are with payments.
It has been quite expensive.
On the whole it has done a job, it freed up some cash and has helped us grow but we should have managed the whole process more and been more aware of what they would finance.
We have just employed somebody to do all of our credit control so will be looking at moving away from invoice financing in the near future.
It has done a job, it freed up a lot of our time but there have been some issues and it did actually harm our cashflow at one point. The main issues have been
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.
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.
As Eric said it is very difficult to show in your accounts where you are with payments.
It has been quite expensive.
On the whole it has done a job, it freed up some cash and has helped us grow but we should have managed the whole process more and been more aware of what they would finance.
We have just employed somebody to do all of our credit control so will be looking at moving away from invoice financing in the near future.
I think the "control" issue is its major flaw (more even than cost). When you pass over your list of Debtors to a third party as security for "borrowings" you begin to lose control over the management of those debts.
Factoring has its place in business, but only in certain circumstances.
Factoring has its place in business, but only in certain circumstances.
thank you all for your extreamly invaluable input.
normally, all orders are dealt with on a pre-payment basis.
i have taken a risk allowing this to be invoiced.
but it was the fist large order, and the money will allow us to develop our infrastructure ( and get a van! ) and due to the client being a college, we felt the risk of non-payment was low ( just because it was a college really, no facts or information to back that up )
its just that im getting a bit worried that they wont pay on time ( money was due in today ) and i wont have the liquid capital to pay all the extra staff i took on for this job.
i was just thinking that if i got the invoice factored, i would have the cash to pay the staff, and if the factoring company ends up taking their money back, then the debt would be on my head, and i wont have 18 small claims court cases against me for non payment of wages lol!
normally, all orders are dealt with on a pre-payment basis.
i have taken a risk allowing this to be invoiced.
but it was the fist large order, and the money will allow us to develop our infrastructure ( and get a van! ) and due to the client being a college, we felt the risk of non-payment was low ( just because it was a college really, no facts or information to back that up )
its just that im getting a bit worried that they wont pay on time ( money was due in today ) and i wont have the liquid capital to pay all the extra staff i took on for this job.
i was just thinking that if i got the invoice factored, i would have the cash to pay the staff, and if the factoring company ends up taking their money back, then the debt would be on my head, and i wont have 18 small claims court cases against me for non payment of wages lol!
Look if its only £800 you require and you are confident of the business, then either put the money in yourself or take the money out on a credit card (cheque or cash) and lend it to the business. OK you'll drop some interest and cash advance payments on your CC, but hey are probably less than the banks overdraft fee for an £800 overdraft
davidy
davidy
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