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Invoice factoring Company

Favell Recruitment are a family owned business started by brother and sister Oliver and Alicia Favell. They are a recruitment company based in South Yorkshire that specialise in the construction sector.

The business started trading in 2014 and to finance it’s rapid growth they entered into an invoice finance facility with Aldermore Bank Plc. They set this up on a the Aldermore ABC product which is a fixed price facility and they had an overall credit facility of £50,000. Sadly, the facility did not generate the required working capital but when they looked to terminate the agreement Aldermore levied early termination fees.

Problems

The facility had run satisfactorily but they soon outgrew the facility. In order to double the facility limit to £100,000 Aldermore doubled their fee structure to £900 per month plus an additional 0.65% of turnover for bad debt protection. The facility was also restrictive as there was a 50% concentration limit on the facility and their top customer could represent more than 50% of their sales ledger. This put pressure in Favell’s cash flow as the facility was not generating the required cash.

Favell Recruitment felt that the facility was both restrictive and expensive. As a result Oliver looked to source a better structured facility. A facility was sourced from another lender that provided an increased facility limit, increased prepayment, increased concentration limit, full funding limits on all their debtors and also provided considerable savings.

Cost Comparison

Lender                                                        Aldermore                                         New Lender
Facility Limit                                            £100,000                                            £200,000
Prepayment                                              85%                                                      90%
Concentration Limit                              50%                                                      100%
Service Fee                                              £900 flat fee                                       1%
Bad debt protection                               0.65% of gross turnover                  Included in service fee
Discounting Fee                                     Included in flat fee                            2.5% over bank base rate

In terms of costs, if we analyse the fees paid by Favell to Aldermore in December we can see that despite borrowing just over £7,000 at the end of December having notified just £23,164 of invoices the fees for the month were £1,230.16. Of this, £900 was fixed cost service fee which represents 3.88% of turnover and this did not include the bad debt protection.
If the new lenders facility had been in place the costs would have been circa £450. This is a reduction of over 60% in costs. Due to the inflexible fixed fee arrangement and the low turnover in December due to the slowdown in the construction industry this may be somewhat skewed. However, the service fee element would have been just £231 compared to £900 and the additional bad debt protection.

If we assume a turnover of £700,000 and average borrowing of £75,000 the Aldermore facility would cost £16,260 versus the new facility of £10,650. Again a considerable saving of 35%.

Termination Penalties

Favell Recruitment approached Aldermore to advise that they wanted to leave. Sadly, despite the facility being restrictive and expensive Aldermore advised that there would be a termination fee.
Aldermore are members of the Asset Based Finance Association (ABFA) and on Aldermore’s own website they state that “as members of ABFA we take these commitments seriously and are dedicated to ensuring they are RESPECTED at all times.”

If you look at the ABFA Code of Conduct and more specifically the ‘Guidance to the ABFA Code’ it states:

“3.2.3 Where a client requests termination of a facility without the required or any period of notice, even though Members may not have any legal obligation to agree, they are encouraged to give reasonable consideration to such request, particularly where continuation of the facility may cause hardship to the client.”

There is obviously no legal requirement for Aldermore or any other ABFA member to allow a client to terminate a contract early. However, given that Aldermore could not fully fund Favell’s largest customer due to concentration restrictions, it could be interpreted that “continuation of the facility may cause hardship to the client” given that it was restricting profitable trading and growth with their largest customer.

Due to the restrictions on the facility and also what Oliver considered to be excessive fees, Favell Recruitment felt they had no option but to pay the termination fee to Aldermore to exit the facility.
Oliver Favell commented, “This is not a good way to do business especially after it appears they were overcharging us. We were paying a lot of money for a restrictive facility with a £100,000 limit and now we are paying considerably less for a £200,000 facility. All in all I would not recomend Aldermore to anyone ”

With a better structured and more cost effective working capital facility we wish Favell Recruitment continued growth and success.

Recently we were approached by a landscape gardener than needed assistance in raising some working capital. The family owned business has issues as they were working for the well known house builders. These clients would take a long time to pay and in the meantime they had to pay their workers weekly.

They had approached their own bank who were unable or unwilling to provide an overdraft facility. They referred them to their invoice finance arm who were unwilling to assist as the business was considered to be in the construction industry as they were required to submit applications for payment to the house builders like any other contractor. From there they had approached several independent invoice finance providers who were unwilling to help for the same reasons. The landscape gardener then approached us at Funding Solutions UK.

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The best factoring company for your business will depend on the unique characteristics of your business and importantly on your own requirement.

The main aspect of any factoring companies proposition is the structure of their facility, service levels and pricing.

Structure of a facility

It is imperative that the facility is structured to meet the needs of your business but some lenders may not be able to structure a facility to meet your needs. Some lenders have a credit policy that will not allow them to finance any debtor that exceeds over 25% of your total ledger. If you have one large customer that accounts for a large proportion of your sales ledger or all of your sales ledger such a lender would prove to be restrictive. You will need a lender that does not have such stringent criteria when it comes to concentration limits. Another example can be exports. Some lenders will simply not finance export sales so if you have export sales or are looking at export sales than you need to consider a lender that can finance those sales. Smart Factoring Quotes understand the capabilities and requirements of each lender in the market.

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I am often amazed at how much disbursements cost factoring clients over and above the ‘headline’ charges. It is not uncommon for some clients to be paying more in disbursement charges than they do in service fee and discounting fee combined.

I was with a client yesterday where this was the case. When I spoke to them about the fees they were very upset about the ‘games’ the factoring company concerned were playing.

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Smart factoring quotes have a new and improved website.

The site has been restructured to ensure that navigation is now easier and a bespoke quotation can be started and obtained from any page.

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If you are looking for a factoring company then it is imperative you choose the one best suited to your business and your factoring requirements.

Factoring companies all differ in terms of how they structure facilities, what restrictions they impose and of course how they price their facilities.

In a basic level each factoring company offers different prepayment levels and different pricing structures.

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We often get asked to recommend the best invoice finance company. I thought I would look at what makes a good invoice finance company.

In part it is a case of horses for courses. Some lenders are well suited to small businesses while others are better suited to larger businesses. The same goes for different sectors, different geographic locations and different scenarios.

Common complaints with lenders surround poor service levels. I must admit in some cases it is simply because the lender has said no to a client. Sometimes this is justified and in other instances it just seems like a lazy answer rather than doing some work to solve a problem.

Some lenders genuinely pride themselves on top quality service levels and customer satisfaction. This however can be a double edged sword as the same lenders can be described as expensive in comparison to lenders who cut corners and provide a poor service.

Communication is a key factor. As an invoice finance broker I can fully appreciate this. It seems like the most basic concept in any business relationship but I am often left amazed at how many lenders simply fail to return calls or e-mails both with myself and clients.

They say that service is inseparable from the people that provide it. This means that staff within invoice finance companies need to be engaged and happy. This comes as a result of fair remuneration, good training, clear goals and a good environment to work in. Some lenders clearly provide this while I know that others simply don’t. It may be a bit of a generalisation but the lenders that treat their staff properly also seem to be the 0ones that treat their clients properly.

Recruitment Finance is a new site that has been launched by the Cash Flow Solutions group.

While it is still under development it will provide an in depth guide on what facilities are available for recruitment companies.

Recruitment companies typically access recruitment finance to allow them to pay wages of their temps. This can take the form of a simple invoice discounting facility, a factoring facility with the added benefit of a credit control service or a full back office solution that provides a full back office service.

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