Factoring broker
Companies which have significant amounts of money tied up in unpaid invoices should consider factoring as a hassle free way of raising finance. Through a factoring broker they can access the best deals on the market and borrow at competitive prices, in a more flexible way than using conventional bank finance.
How factoring works
Factoring is a simple process to administer once the initial agreement has been set up. Every time an invoice is issued to a customer, the company sends a copy of the invoice to the factor. The factor will then advance up to 90 percent of the invoice value, usually within 24 hours, and will take responsibility for collecting the payment. Once the customer has paid, the factor will take its fees from the payment, and remit the remaining sum to the company.
The factor will want to be satisfied with the quality of your customer base – this is part of the work that needs to be done before the arrangement can be set up. However, once the factor is happy that your customers are creditworthy, it can advance funds on the security of invoices without needing other collateral or needing to see a management track record. That can be useful for startup companies or management buy-outs where managers do not have substantial personal assets, or where the company does not own much in the way of fixed assets.
In some cases, management buy-outs have been almost entirely funded through a blend of asset based finance and factoring. Borrowing against stocks and invoices may be possible where a bank would consider a fixed term loan too risky. (Overdrafts, which are repayable on demand, are of course not suitable for funding a business purchase.) While some trade finance organisations which are subsidiaries of major banks specialise in tailor made financial solutions, you might also benefit from approaching a factoring broker who can put together a flexible deal for you.
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Flexibility - factoring grows with your business
One major advantage of raising money through factoring rather than through a conventionally structured loan is that the amount borrowed is automatically adjusted in relation to the level of turnover. Advances are received quickly. If you use fixed loans to finance your business, taking on a large new order may involve securing a new loan – which could take weeks. On the other hand, if you factor your invoices, you know that you will receive a high percentage of the value of the contract as soon as it is invoiced – which covers your costs while you are waiting for the customer to settle.
Factoring can make a huge difference, for instance, if you're chasing a major supermarket contract. Being able to respond quickly, without worrying about how to fund the increase in your working capital, could make the difference between winning an important new order, and losing it to a competitor.
Companies which are growing fast will be relieved that they need not look for new sources of finance every six months or so – their factoring finance will growth with the growth of the business. There's another way in which factoring can make your life easier, too. Because the factor is in charge of the sales ledger, and takes responsibility for collecting payment from your customers, your accounts department can spend its time running the business instead of chasing late payers and worrying about cash flow.
Of course this does mean that the factor becomes a key point in your communications with your customers, and you need to feel that the factor will do a good job of representing you. On the other hand, if you want to retain control of your own sales ledger, than you could choose invoice discounting – a similar arrangement to factoring, but which is invisible to your customers. It works out slightly cheaper in terms of fees, as the finance company will only be advancing money against invoices and not managing your collection process.
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Advantages of using a factoring broker
Of course you could decide to approach a factor directly. However, as with any purchasing decision, you should ideally get at least three competing quotes. Identifying the right factoring companies to approach, meeting with them and comparing their quotes can be time consuming. This is where using a factoring broker can save you time and money.
A broker will have invested significant time in getting to know the main players in the market, and will know which firms are reputable, and which are not. Factoring brokers will also know which factors are most appropriate for different types of client – some, for instance, may be part of a major trade finance house, and able to offer tailor made packages including asset backed finance as well as factoring. Others may specialise in particular industries.
Factoring brokers will also have been through the small print in different factoring companies' contracts and will be able to advise you on issues such as termination periods and procedures, and your ability to raise other loans (which may be restricted by some factoring contracts). Companies which have found factoring unsuitable for them often owe their unhappy experiences to the fact that they did not have enough experience or knowledge to perform adequate due diligence before entering a contract.
A factoring broker will also be in position to compare different factoring companies' rates. Since factors charge both fees on the total turnover, and interest on advances made, it's not always easy to compare them. Generally, you should expect to pay one or two percent over base rate for the funds advanced; there is also a service fee. That may vary between 0.5 percent and 3 percent. That is a substantial difference; a factoring broker may be able to ensure you get the best terms available on the market, making a significant saving.
Where to find the best deals
Factoring brokers may also be able to get discounts for business they introduce, since they are responsible for a large amount of financing and it's in the factor's interest to give them advantageous terms. Not only should you be getting the best deal available, but that deal may itself be a little sweeter than you would have secured if you had gone direct.
So, what do you pay for all this? Nothing! The factoring broker normally recovers fees from the finance company – so you are not charged for the advice.
How much cash could you release from your unpaid invoices? Compare quotes online >>
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