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Pitfalls

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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Cashflow Finance is currently under construction as a resource to help businesses who are looking for cash flow finance solutions.

The site will be aimed at businesses who are seeking advice about their cash flow finance options.

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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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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 can take various formats. Typically it depends on the type of recruitment and also the size of the company. We will look at the three main options available:

Recruitment factoring: this is suitable for recruitment companies of all sizes and for both temporary recruitment companies and permanent recruitment companies. It provides an advance against invoices raised of up to 90% allowing temps wages to be paid. It is also suitable for permanent recruitment companies but prepayments are typically around 70% for perms. Recruitment factoring is available to new start businesses aswell as larger well established companies. It includes a credit control service and can also include credit protection to reduce the risk of bad debts.

Recruitment invoice Discounting: suitable for companies that are better established and have a good credit control function within the business. This type of recruitment finance does not include a credit control service. It can be confidential or disclosed and can include credit protection to reduce the risk of bad debts. Again it can be used for either temporary recruitment or permanent recruitment.

Recruitment back office solutions: well suited to recruitment companies that want to outsource the full back office function. This service can provide finance in the same way as factoring but 100% prepayment levels can be achieved. It also includes payroll and admin services as well as optional credit protection and credit control.

If you have a requirement for recruitment finance it is worth contacting Smart Factoring Quotes to discuss your options in detail.

Factoring Rates can differ dramatically from lender to lender. We will have a look at what variables impact on the pricing of a factoring facility and then we will look at why some factoring companies are more expensive than others.

What impacts on the service fee?

The service fee is what the lender charges for administering your facility and it is typically determined by workload. This is dictated by the number of debtors you have an also the number of invoices you issue. Turnover also has a huge impact on your service fee and typically the higher your turnover the lower the percentage service fee.

The discounting fee, what impacts on this?

This is the cost of borrowing and it should reflect the risk the company is taking. The total fee is made up of the base rate and the margin. Some lenders use the Bank of England base rate while others use LIBOR. Watch out also for the minimum  base rates which a lot of lenders put in place. The margin is often dictated by their credit policies and with negotiation can often be reduced.

These are the 2 main fees but it is important to be aware of additional fees and charges. Always consider total costs when looking at different offers. Please also consider what service is actually on offer and ensure it meets the needs of your business. Factoring rates are obviously important but so are service levels and facility structure.

We often receive inquiries from clients who are keen to transfer from one lender to another because the credit control is poor.

I am afraid to say that often the provider accused of providing a poor service is a bank owned factoring company. However, when we ask how the factoring company was chosen there is also a common theme. They were either chosen because that is who the business banks with so it was a default choice or because they were the cheapest.

Without going to the market it is almost impossible to understand what your options are. If you don’t understand what your options are then how can you make an informed decision?

If you have chosen the very cheapest option then are you really surprised that the service does not quite meet your expectations? Would you expect free champagne on an Easyjet flight or free home installation from Ikea. No, of course you wouldn’t.

Typically with credit control from a factoring company you will get what you pay for. The larger bank owned factors will typically fully automate their credit control and it will be done by automated letters and month end statements. They may call your largest debtors but it will be a hands off approach.

Other factoring companies will provide a hands on credit control service where they call each debtor and have open communication with you the client. This however is time consuming and as such the cost for such a service is more expensive.

When choosing a factoring facility it is important to understand what level of service you expect and choose a lender accordingly.

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