Factoring - Dispelling the myths around this flexible funding solution
Factoring has earned itself a place at the mainstream funding table but despite this, there remain some common myths that just refuse to go away regardless of the numerous attempts to address these false beliefs.
Pulse Cashflow want to cast these myths aside into the fantasy world where they belong and provide you with the information you need to dispel them once and for all. So, what are these myths and let’s set the record straight once and for all.
“Factoring is for companies that are about to go out of business”
This comment is so out of date. Factoring or Invoice Finance and Asset Based Lending as it is more commonly known today, continues to support over 40k UK businesses. At the end of 2018, funding support for businesses through Invoice Finance and Asset-Based Lending stood at £22.7 billion – a growth of 2.5% on the previous year and a figure that is comparable to total balances drawn on overdrafts. It’s interesting to also see that the number of larger SME’s – where turnover exceeds £10 million pa – using this dynamic alternative finance, rose by 13% on the same period last year.
The myth was borne because banks would offer businesses an overdraft as the first port of call when looking for finance. However, if the firm had experienced financial issues or did not meet the ever- changing lending criteria, then the bank would prefer to offer Factoring as the solution because they would hold the book debt as security should further financial issues arise which might cause the business to fail.
“Invoice financiers are lenders of last resort”
This is no longer the case. To reiterate with over 40k businesses using more funding through invoice finance than bank overdrafts, factoring has been confirmed as a primary source of mainstream funding. High Street Banks have over the last decade continually been changing their lending criteria and have been encouraging businesses to use Invoice Finance because it offers a more flexible cashflow solution based on real time performance whilst managing their own risk. Despite this, in
some quarters there still appears a reluctance to embrace this popular form of finance, perhaps in some part due to a lack of understanding as well as out of date misconceptions.
“Factoring is expensive!”
Compared to what? You need to make sure you are comparing apples with apples. Most people compare the cost of Factoring with a bank overdraft. But this is not like for like. Factoring gives greater flexibility in terms of the amount of funding you can access because it’s based on real time turnover and not historical management or audited accounts. More importantly though, Factoring includes a professional outsourced credit control and sales ledger management service which
provides internal cost savings and frees up management time to focus on developing business. It is important that the business weighs up the costs of the facility versus the benefits it delivers.
Remember, improved cashflow can mean that you can save money by opting for early settlement terms with your suppliers. Whilst the credit control and sales ledger management service can improve your debtor days releasing cash into the business which makes the facility cost effective. For example, a 4-day reduction in average debt turn will release over £10k back into working capital for a business turning over £1m.
“The fees are complex and confusing”
Pulse Cashflow found that our clients found the way the industry charge their fees can be confusing; so, chose instead to offer a single fee to provide you with the transparency and simplicity needed. No hidden extras making it easy to plan for the cost of finance.
Make sure you understand the total cost of finance by asking what fees you will incur before you embark upon this route of facilitating cashflow. The majority of Factoring Companies charge two fees – the cost of finance via interest and the actual facility service fee. In addition to this there are often further fees added for other services provided, so it is wise to find out exactly what is included within the facility and what is not. Securing funding for selective invoices can provide a more transparent option as fees are fixed in advance and charged only against funds in use.
"I can’t Factor my debt because my customer has a Ban on Assignment clause in their Terms and Conditions"
This is no longer the case. Recent legislation came into force at the end of 2018 which prohibits contractual clauses which prevent businesses (normally dealing with the Government and Construction) to assign their debts to a third party.
A ‘Ban of Assignment’ clause had been routinely included in contracts when supplying services to industries like the Government or Construction. If the clause was present, then the supplier would need to seek written permission to ‘assign’ any part of the agreement or benefit of the agreement (payment) to a Third Party.
"Factoring Companies are just Debt Collectors"
When a business sells their goods or services to another business, they expect to get paid for it. Therefore, it is both essential and necessary for every business to chase and collect its own debts. It still amazes us how many businesses do not have someone responsible for performing this important task of ensuring monies owed are collected and vital cashflow thus supported. It is often common to see the business owner include this task as their own along with the the numerous other hats worn – Sales Manager, Finance Manager, Warehouse Manager etc
Pulse Cashflow would start by working to collect payment from those customers who are past due and then concentrate on ensuring other customers pay on time, reducing debtor days and improving cashflow. We are committed to working with your customers to collect payment in a professional and sympathetic way whilst ensuring you are paid promptly.
“Factoring ties up all customer invoices”
Invoices represent cash which is tied up and unable to be used by your business. Factoring is a funding facility which aims to maximise the amount of cash available in your business so that you have a constant flow of working capital. The amount of funding available to the business is normally based on whole turnover so that the facility provides a higher level of available funding than other traditional forms of finance. In order to achieve this, the facility is based on your whole turnover and therefore releases cash from each and every invoice on the date raised as opposed to when you are paid.
“It damages customer relationships”
Customer relations are key to our clients and therefore maintaining positivity even through credit control procedures is a priority in order to maintain a good working relationship. We work with our clients to determine what course of action they would like to take if invoice payment remains outstanding. In times of economic turmoil, it can be hugely advantageous to have the facility to credit check customers and have the option of insuring against the possibility of non-payment to
protect the health of the business. With a range of solutions on the market, businesses can also opt for solutions where they manage their own credit control processes, therefore maintaining direct control over client relationships if they choose.
“Terminating a Factoring Agreement is difficult to do”
We are all aware that business agreements or contracts are there to protect each parties interests’ during the term of your business relationship. When you sign up to a Factoring Facility, your Agreement is there to outline how each party should treat each other. This also includes how they work with the client’s customers who are the lifeblood to any successful business. The Agreement provides clients with the certainty of funding as long as they follow the operational conditions. The industry works on either 12 or 24-month contracts, however, in recent years, some funders offer single invoice solutions which have no contractual terms making it easy to use. However, these solutions are not developing a relationship between the funder, the client or their customer.
In a fast-changing financial environment with new lenders coming in to the market with new services, it is important that professional advisors, accountants and introducers have the necessary resources and information to hand, so that their clients can find the right home for their needs at the right time. Ensuring you work with an established funder with a proven track record and one where you can speak to decision makers is vitally important in maximising this funding experience.
Hopefully now you are armed with the knowledge to dispel at least a few of the myths that surround Factoring.
We face uncertain times and it is essential that businesses have access and use the funds available to them to support their trading plans. Why not find out more today about how this flexible finance supports business growth.