Factoring, Is it really worth factoring into your prices?

[mike_lawrenson]

Hello,

I am just wondering if anyone here has ever signed up for a factoring service to improve cashflow?

Did you regret it and why?

I'm 60-40 on whether I should consider doing it for my new business, as my orders are quickly out weighing my credit limits...

 

[crphillips]

My bank tried to get us into it when we were in trouble 3 years ago with another business. I ran through it with my accountant and she said she'd kill me if I did. It was good advice. I have a friend who has invoice factoring and it costs him a fortune. It's not much different from an overdraft....once you've had that month in advance then your always a month behind and to get out of it you've got to earn double. Don't do it if you can avoid it. It's expensive money. So glad we didn't.

 

[Arhob1]

I am using it for the first time now.

I won a £1M + contract but it needs about £150k of development to deliver. Out of all the options open to me factoring seemed the best. My supplier (the developers) wanted the business but need paying so THEY found a company who would factor their invoices at a charge of 4% for 3 months (from memory - might be 6 months). I agreed with my supplier that they would pay 2% of the charge and I would pay the other 2%.

We are all happy

 

[Ian J]

I deal with a dozen or so enquiries a month from companies wishing to use factoring to improve their cash flow. The vast majority seem to be quite happy with their facilities but if a company is badly managed and loss making then the injection of funds from factoring will do nothing for it but hasten it's demise.

It's not much different from an overdraft....once you've had that month in advance then your always a month behind and to get out of it you've got to earn double

That's a quote that's trotted out quite regularly but surely if a company is factoring which has provided an injection of funds of £100,000 it's just as easy or difficult to get out of it as it is for their competitor who is funding his business with an overdraft of the same amount.

I have a friend who has invoice factoring and it costs him a fortune

It depends on how you quantify "a fortune" If a company is making £10,000 profit but doesn't have enough working capital to expand he can take on a factoring facility which will cost him (say) £7,500 but generates enough liquidity within the business to increase the sales to a level where the company makes a profit of £25,000 then surely factoring is cost effective.

It may be cheaper to borrow sufficient funds from a bank on overdraft but we all know that's unlikely to happen in this day and age.

My advice to anyone thinking of factoring is to work out what it will cost you then work out what it will do for you and make your own mind up

 

[crphillips]

Fair enough. The examples above obviously prove that factoring can be useful. My comments were mainly aimed at people thinking of factoring when they're generally low on funds. If you have a big contract and require some working capital then it could be a good option.

 

[businessfunding]

Fair enough. The examples above obviously prove that factoring can be useful. My comments were mainly aimed at people thinking of factoring when they're generally low on funds. If you have a big contract and require some working capital then it could be a good option.

Absolutely correct - Unfortunately banks have tended to push their ailing clients into factoring agreements, hence the reputation of factoring as a last stop before bankruptcy.

Used in the context of gentle or rapid growth it can become the backbone of your business.

No form of finance can stop a failing business from failing, but every form used correctly can help business growth.

 

[Ian J]

Unfortunately banks have tended to push their ailing clients into factoring agreements, hence the reputation of factoring as a last stop before bankruptcy.

That old chestnut again

A hullava lot more companies have gone bust that haven't factored yet we don't hear people crying out that not factoring leads to bankruptcy

 

[Moneyman]

Be very carefull. It is a very expensive way of getting funds and you need to check every detail of the contract as to how you get paid should a customer go bust. Sometimes you take the hit anyway long term. It also does not always look good to the customer and they can anoy good customers.
I would advise having a look at invoice discounting as well.
Never sign a long term agreement as it is something you want to get out of ASAP.
You can also buy a bond for a big contract which is a one off guarantee that you will be paid.

 

[Ian J]

Hello,

I am just wondering if anyone here has ever signed up for a factoring service to improve cashflow?

Did you regret it and why?

I'm 60-40 on whether I should consider doing it for my new business, as my orders are quickly out weighing my credit limits...

Currently about 42,000 companies use factoring or invoice discounting and if you need further working capital to fund growth factoring is often an excellent idea.

My bank tried to get us into it when we were in trouble 3 years ago with another business. I ran through it with my accountant and she said she'd kill me if I did. It was good advice.

It was excellent advice and very wrong of your bank to suggest factoring if you "were in trouble" The concept is excellent for growing and profitable companies as that is primarily what the facility is intended for but it can often hasten the demise of loss making concerns

 

[Geoff T]

Ian made some good points...

Factoring/ Invoice discounting has it's place - like most everything...

If it will give you a residual profit, and allow you to grow - consider...

If it will turn "profit" to "loss"... you need another option...

 

[Richie N]

Worth considering if it will benefit your business, not just cashflow but managing your accounts.
We used to use a factoring company for temps and they actually lost us a few customers due to the way they handled the accounts, our clients stopped using us because they didn't want to deal with the factoring company.
I know of a few other agencies that have had the same problem, so you need to consider everything, not just cashflow benefits.

 

[firstmarket]

We use a factoring company. We had a 250,000 loan from the government for product development and bringing it to market along with a 40K overdraft which soon ran out. In order to gain market penetration we were forced to allow monthly payments for our product from customers whilst we are burdened with a 30 day payment limit.

Our factoring costs is 15% but our profit margin is in the region of 60% so it's manageable and has given us the opportunity to grow rather than stall.

 

[Ian J]

Our factoring costs is 15% but our profit margin is in the region of 60% so it's manageable and has given us the opportunity to grow rather than stall.

15% of what?

Factoring costs are normally expressed as a percentage of turnover and even Shylock wouldn't charge that much

 

[Geoff T]

15% of what?

Factoring costs are normally expressed as a percentage of turnover and even Shylock wouldn't charge that much

- funny...

 

[yourcreditmanager]

Hello,

I am just wondering if anyone here has ever signed up for a factoring service to improve cashflow?

Did you regret it and why?

I'm 60-40 on whether I should consider doing it for my new business, as my orders are quickly out weighing my credit limits...

I'd agree with a lot the posters here - factoring in its various forms has a lot of uses but there's always other options. You mention your orders are quickly outweighing the credit limits you offer your customers? Do you ask for deposits, offer early payment discounts or implement a strict a credit control regime for both your new and existing customers?

Michael

 

[Geoff T]

Hello,

I am just wondering if anyone here has ever signed up for a factoring service to improve cashflow?

Did you regret it and why?

I'm 60-40 on whether I should consider doing it for my new business, as my orders are quickly out weighing my credit limits...

Aside from anything else (although decent Credit Control is the foundation as Michael suggests)

The commercial side of what we do is to look at the credit limits themselves...

Are the limits realistic?
Does previous good behaviour suggest an increase?
How well do you know the customer?

(just a few free tips to give you the idea...)

Good CCM could sort this for you...

 

[Ian J]

You mention your orders are quickly outweighing the credit limits you offer your customers? Do you ask for deposits, offer early payment discounts or implement a strict a credit control regime for both your new and existing customers?

Looking at his other posts it would seem that he has a fairly low credit limit from his supplier and that is what is restricting his growth so he needs finance / credit control / whatever to turn his cash round quicker.

Factoring will help as it will enable him to pay his supplier quicker and therefore buy more product but ideally some sort of trade finance would be ideal as that would fund the purchase of product which is what he seems to want

 

[firstmarket]

15% of what?

Factoring costs are normally expressed as a percentage of turnover and even Shylock wouldn't charge that much

Ian,


It's 15% of our profit margin that goes on factoring costs.

 

[Geoff T]

Ian,


It's 15% of our profit margin that goes on factoring costs.

i REALLY hope NPM is more than 15%!

Ian's right though, charges are usually based on turnover... have you looked at that %age?