John Tinsley : Money Matters

For a business that has decided to use invoice finance services, the first step is to choose the right factoring company. This is not always as simple as it may seem, due to the wide range of fees charged for these services. Companies should therefore always research their options and find a reliable and affordable company.

Using a Broker

One option is to use invoice finance brokers to help negotiate with factoring companies for this service. These brokers receive a commission from the factor, in most instances, so the client company is not charged for the negotiation service. The company outlines its specific requirements and the broker does the work of finding the most reliable factor.

Considerations

Businesses that choose not to use a broker will need to do the research on their own. One of the first considerations is to check out the each factoring company’s reputation. Those who do good work will have satisfied customers to point to as referrals.

Companies should also consider how the prospective invoice factoring company runs its business. Does it handle disputes and queries or would that be the responsibility of the client company? Does the financing provider offer the type of financing services the business needs, such as recourse or non-recourse options? These specific considerations will help narrow down the field to the best candidates.

When all else is equal, the company should consider the cost. If two factors offer the same services at different costs, then the cheaper one may be the best choice.

Businesses that opt to use invoice factoring are often seeking to boost cash flow in the short-term.  Working capital is hard to come by and by realising the value of outstanding invoices, particularly when they are for a significant amount of money, companies can sometimes raise substantial sums quickly and easily.  Often, funds can be released as soon as an invoice is issued, which means cash is available for capital investment and for funding the production of future goods or services.  Costs of factoring vary, but are generally competitive, as there are numerous factoring companies from which to choose.

A company that is free to focus on its core business has an important advantage, especially in competitive markets and as invoice factoring means the task of credit control is being carried out by the factor, this is a distinct bonus and can be much more cost-effective for the company; financial planning can be improved and cash flow problems are eased.

Advice and help from factors offers many advantages too; they will know about the credit status of customers and can often assist businesses with negotiating more favourable terms with their suppliers.  By the same token, some customers may be more inclined to pay promptly when asked by a factor, especially if it is a reputable bank or financial institution.

Business planning benefits from sound advice and the strategic expertise of an experienced factor is often just as valuable as its financial resources.  With certain types of factoring, businesses can be protected from bad debts too.

There are costs involved in factoring, of course and these will have an impact at some level, perhaps reducing the potential for additional borrowing elsewhere.  Occasionally, certain customers may feel uncomfortable when dealing with a factor and may prefer direct negotiations with the business.  For this reason, it is important to make sure a factor with a good reputation is engaged, so that the business’s image does not suffer.

Touch Financial was founded in 2008 and is now the largest independent factoring broker in the United Kingdom.  The company works with more than 20 lenders, including independent funders and high street banks and has access to special offers and preferential rates.  Touch Financial raises business funding of approximately £3.5 million every month for its customers and The Business Moneyfacts Award 2011 named the company the Asset Based Finance Broker of the Year; impressive recognition for a relative newcomer to the industry.

A factoring broker works to help companies identify and implement financing options, including invoice factoring and works to assist lenders to identify where there is a good fit with a potential customer.  A good factoring broker understands clearly the needs of both parties to the business deal.  Touch Financial does not charge companies for the service, but instead obtains fees from lenders for brokering financial arrangements.  An experienced factoring broker, the company will be able to quickly match the needs of a business with a potential lender, so that options for invoice discounting, for example, can be readily identified and business cash flow issues can be addressed.

In business, money is not just something to be earned it also has to be made to work as efficiently as possible. It is advantageous for companies to delay paying its bills for as long as possible in order to gain the most use out of cash in hand and to collect money owed to it as quickly as possible. Naturally, this creates a problem, as all businesses try to hold on to their money until the last minute, while trying to convince their debtors to pay up as quickly as possible. 

Factoring companies, such as Touch financial, provide a service whereby they provide a large percentage of the amount due on the sales invoices and then collect the outstanding monies owed. These factoring companies take on the task of collecting payments while the providers of goods and services receive, in return for a small fee, most of the money they are owed almost immediately.

Having the money sooner, rather than later, can make a tremendous difference to a company’s financial health. It eliminates constantly shopping for short-term loans, allows for more aggressive investing and most importantly perhaps, enables the company to take advantage of incentives from its own suppliers who want to be paid as early as possible. As if these advantages where not enough, to offset the expense of factoring, the money companies save by reducing the costs associated with employing credit control staff need also to be taken into consideration.

If you think that a growing business will never experience cash flow problems or that such problems are a sign of a failing business, think again. A growing business often needs a substantial investment in new machinery, tools, computer hardware and software and raw materials.

Since relatively new businesses do not have an established credit record, its suppliers might require it to pay within 30 days, while to become established it may have to grant 60 or even 90 days to its debtors.

All of this can and often does, result in cash flow problems. Especially in the case of a relatively new business, it might be very difficult to obtain finance through traditional channels, such as high street banks.

This is where invoice factoring comes in. It provides any company with a reliable debtors ledger, consisting of other business clients, to ‘sell’ its debtors to a so-called factor. The factor will then give the firm a cash advance, usually between 70% and 85% of the total value of the debtors ledger. Once the accounts have been settled in full, the balance will be paid out after deducting costs.

The main benefits of invoice factoring are that you do not need stacks of financial statements or a flawless credit record to convince the factoring company. All they will be interested in is a sales ledger showing reliable debtors to cover the amount you want to borrow.

Since the factor usually takes over the collection of all outstanding debts, you will also no longer need a credit control department, which means you can use that staff more productively elsewhere.

A word of warning, however, it takes years to build excellent relations with your customers. You should therefore choose the factoring company very carefully. Make sure you select a company with a history of dealing with customers in a courteous and professional manner.