Invoice Factoring

System

Can anyone help?

I have a new client who was bounced by his bank two years ago into factoring his invoices rather than the bank manager have someone with a £12,000 overdraft. The amount he owes on factoring now stands at about £20,000. Does anyone have an idea on the best way to get out of this arrangement since it is costing him a lot in charges? Would it be best to take out a business loan to pay the factoring off?

Thanks
Ben

System

Re:Invoice Factoring

I used to have a client who factored their invoices. Business moved in a different direction, ie not needing factoring, and factor company got my client into liquidation, and amongst other people i got stuffed for fees, so my views on them are not printable. If he can get a business loan - and remember to allow extra for cashflow for the period of credit that is given to customers - that would be the best way to go.

Hope this helps a little.
Claudia

System

Re:Invoice Factoring

Dear Claudia,

Many thanks. You have given me confidence in talking with my client.

Regards,

Ben

System

Re:Invoice Factoring

You may want to advise your client to look closely at the agreement they signed when the Factoring arrangements commenced. In certain circumstances, I would advise having a Solicitor run through the arrangement both prior to commencement of Factoring and certainly if they want to terminate the agreement.

Factoring companies have been known to charge quite substantial fees to terminate the agreement so your client may want to take this issue up with the Factoring company. Factoring is used by companies who have restrictions on their cash flow due to slow payment by customers, however, the cost for the privilege of "immediate access" to (usually) 80% of the value of the invoices factored is very high and can sometimes run into thousands of pounds per year.

My opinion of factoring is that it can sometimes be a case of "robbing Peter to pay Paul", though in today's business climate factoring is becoming an increasingly popular source of finance for some business (particularly in Manufacturing).

Steve

System

Re:Invoice Factoring

Your suggestion of having a solicitor review termination of the agreement is very helpful. My client is being pressured by the factoring company to renew the agreement.

With Thanks,,
Ben

System

Re:Invoice Factoring

I would imagine it less costly NOT to review the agreement than to terminate it early (like a mobile phone contract).

Again, though, your client would be better seeking legal advice as to where he/she stands. Banks/financial institutions can be ruthless in such circumstances and it is important that your client seeks the best advice on how to proceed to his advantage if the factoring company pursue your client for a sum of money that could potentially mean send his business under.

Kind regards
Steve

System

Re:Invoice Factoring

How long until the agreement needs renewing? Also, how reliant is your client on the factor company for getting his invoices paid? If the debtors do not pay well/quickly, can your client afford not to have a factor company? As your client's reliance is increasing rather than decreasing, I would be dubious about his/her ability to come out of the factoring agreement without financial difficulty.

I would have thought the best way out of a factoring agreement would be to reduce the reliance on the factor company by building up cash reserves.

System

Re:Invoice Factoring

I would suggest reviewing the arrangement, with particular attention to the fees, buy/sell back periods and credit control.
Some factoring companies charge exhorbitant fees, charge again if the invoice is not paid within, say, 3 months, but do nothing constructive about collecting payment.
You could try negotiating rates, or shopping around for another provider, although I agree the financial penalties may be high.
Alternatively, you could persuade the client to get involved in credit control, to reduce the outstanding debt and improve debtor days. In my exsperience, if a customer is not being chased for payment, he will soon learn it won't matter if he doesn't pay. This, in turn, has an adverse affect on the credibility of the business owner (in the eyes of the customer) and encourages contempt.
I have many years successful experience in credit control - if you or your client would like some more detailed advice, please feel free to contact me on sheelagh@smbb.co.uk