Factoring Vs Credit Control

[Keeper of Da Books]

Deep Breath *opens up a can of worms*

Hi all
I'm sure there have been many discussions on here regarding factoring pros/cons, but I am interested in your opinion on the following...

My Client has been working with a factoring company (RBS) for a couple years now, and has found the 70% advanced payment useful to cash flow, but has brought its fair share of problems, especially with not all of the ledger being available due to 'excess concentration' :|(where you do too much business with one company)

So, 'because of the credit crunch' and just because they can, RBS have doubled their fees on the new contract proposed to the company (no-one has signed anything as yet)

Any-who the result is that my client isn't sure what to do about this situation. They've recently taken on a person full time to do credit control, so my initial feeling is to bin the factoring and put in proper credit control procedures to save the fees/ hassle/ improve customer relations.


What do you think?
Any advice would be much appreciated
Thanks
M

 

[Ian J]

my initial feeling is to bin the factoring and put in proper credit control procedures to save the fees/ hassle/ improve customer relations.

A further option is to talk to a more flexible factoring company who could well fund a higher proportion of the concentration at more competitive rates.

 

[Peter Bowen]

If you haven't already done so I'd suggest a quick search for factoring on this forum. There have been some interesting discussions over the past few weeks:
http://www.ukbusinessforums.co.uk/forums/showthread.php?t=129373&highlight=factoring

http://www.ukbusinessforums.co.uk/forums/showthread.php?t=125828&highlight=factoring

To me it looks like you probably get a better deal selling your soul to the devil than factoring your invoices. However, I am a purveyor of an astoundingly effective automatic credit control system so my feelings are somewhat biased.

 

[GRDCredit]

The huge advantage of factoring is of course the 70% of invoice being released 'immediately'

I come at this discussion from a biased point of view but as a credit controller I would not pretend I can get customers to pay within 2 or 3 days if your terms are 30/60 days. My role - the role of any credit controller - is to get your customers paying to terms.

Which is right for your client therefore depends on whether he needs the benefit of payment up front and his cash flow could not survive without it.

One of the main problems with factoring is getting out of it once you are involved. For example if you have a liability to the factor company of £50k the next £50k received has to be used to clear your facility before you have any cash of 'your own'

I am also surprised that your client has gone from having - if I read you correctly - no credit controller to a full timer. What size business is he - turnover per month, number of accounts?

 

[Zeno]

Can your client actually afford to extract themselves from their current agreement?

Presumably they owe RBS a fair amount right now (Up to 70% of their trade debt) excluding the various fees, interest etc.

 

[Geoff T]

I am also surprised that your client has gone from having - if I read you correctly - no credit controller to a full timer. What size business is he - turnover per month, number of accounts?

I think we could make some fairly educated guesses as to why/size...

I've been in the same position as their credit controller, and I don't envy them the task ahead of them!

Back to OP, as has already been suggested, you need to look at your options regarding an exit strategy, and either look at other factoring alternatives if needed, or see if the credit controller can deliver and save the company the expense and hassle.

Best of luck

 

[Claire80]

Factoring is cost effective and gives you more time to focus on your business.

 

[GRDCredit]

Factoring is cost effective and gives you more time to focus on your business.

Many thanks for that insight.

 

[Naughty Vend]

There's a simple solution if you have the skill to discuss and negotiate.

In 1996 one of my customers called "Scottish Power" whom you may have heard of wanted a discount on the service provision, so I offered them 2.5% discount for payment within three days of invoice and removed the account from the main company (forming a new one) to get around the factoring provider's contractual obligation that I could not cherry pick clients.

They took me up on the deal, so what I was paying and some more of to the factor was discounted at week one with two benefits of the cashflow being improved and profit being increased... more importantly the client was happy and saved money. In these times isn't saving money an easy sell to make...? Several large customers followed suit, any defaulting clients were returned to the factor on a permanant basis and they numbered... zero... it was too good deal for them.

Don't do what business tells you to, manage and direct which is what a Managing Director does for their salary.

 

[Williams lester]

Factoring is cost effective and gives you more time to focus on your business.

Would you care to elaborate on why you believe it to be cost effective? Without presenting some further information that is a fairly pointless comment.

 

[LaShel Bookkeeping]

I have worked in credit control for over 20 years, the advantage of factoring is easy money released but ask them for a full breakdown of their charges & they also do not chase debt as often as an experienced credit controller does. The biggest advantage in this day & age is that the factroing debt is insured, if a customer goes bump then this doesnt affect your business as the 70% is not re-claimed. It is probably much cheaper to do your own credit control & pay a fee for a reputable credit checking facility.

 

[Keeper of Da Books]

Thank you all

There's currently a £50k/month turnover, with probably about £9k going through factoring (rest is separate internet bujsiness), but as mentioned they don't get the full 70% up front anyway so they get the main monies when the largest customer pays in full.

IanJ - the theory sounds good. I'll definitely be looking into all options as a cost v benefit analysis exercise (what a fun way to spend sunday!)
Thanks PeterB - I've read quite a few of them - thanks - interesting reading
Geoff GRD - they had someone part time who has been on long term sick for a while - but once I looked into it properly, it would appear that they were just sending out statements !!
NVI - I like the idea of discounting the invoices for prompt(er) payment - is there something about the vat involved in that though where have to charge the VAT for the full rate, and then discount the nett on payment or something?

Am still chuckling at PeterB's "better deal selling your soul to the devil than factoring your invoices"
How much is a soul worth nowadays?

 

[Jenni384]

NVI - I like the idea of discounting the invoices for prompt(er) payment - is there something about the vat involved in that though where have to charge the VAT for the full rate, and then discount the nett on payment or something?

If you offer a discount for swift payment, then you have to charge VAT on the discounted amount. The VAT amount remains the same whether the customer takes advantage of the discount offer or not.

 

From your post, it would appear that the main role of factoring here is the advance against cash, rather than the credit control function.

One option would be to consider invoice discounting (through an alternative source - it is seldom a good idea to tie up all your borrowings through your main bank).

The credit control function might well be manageable with a new credit controller and strong procedures.

There is a free Guide to Credit Control for SMEs on our website; www.fundingportal.co.uk.

 

[elliebateman]

Since they only have a part-time credit controller (who isn't really doing the credit control at the moment), they might want to think about outsourcing their credit control. It's cheaper than having someone in-house to do it and, if the right provider is picked, you can have the same control over your sales ledger as you would with an employee but your credit controller is available on a full-time basis rather than part-time.

As others have said, factoring does have it's place but I would only recommend it to someone who needs the cashflow boost rather than as a long term solution.

 

[Kara Grant]

Having worked for a company who went down this route, I'd urge you think about this really carefully. It may seem like a 'quick fix' for your cash flow but once you enter into this its really difficult to get out of it. Effective credit control can bring the same rewards to your cash flow without the barriers and strict processes which factoring involves.