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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.

There seem to be several invoice finance brokerages appearing that are linked to insolvency practitioners. Only today I was asked by a client of mine why this was so I thought a post may be due on the topic.

In short the insolvency practitioners see the invoice finance leads that give to lenders as a carrot to attract insolvency work from the lenders. In fact some of the IP owned brokers will only give leads to lenders if they give them insolvency work in return. I have seen some e-mail marketing from one such broker offering 2 new deals to a lender in return for a ‘fee generative appointment’.

Reciprocity is a buzz word in many industries these days and the invoice finance industry is no different.

However, in my opinion it does raise concerns for business owners who approach these brokerages looking for independent and impartial advice about factoring or invoice discounting. There is every chance that the business will simply be placed with the lender that they ‘owe’ a deal to. If this is the case it means that they are not really acting in the best interests of that client.

Smart factoring quotes are proud to announce the launch of a factoring blog on their new updated website.

The factoring blog is aimed at business owners who have a factoring facility or are looking for a factoring facility. It will provide relevant industry updates as well as discussing topical issues that business owners encounter both with factoring facilities and also with the economy at large.

We will be welcoming any comments but don’t want to become a message board for rumours or scaremongering.

Spot factoring seems to be gaining popularity within the UK and is a fairly common procedure in the US. We are talking about factoring a single invoice as opposed to factoring whole turnover as you would with a traditional factoring facility.

Obviously if you have an ongoing requirement to factor each invoice or the majority of your invoices it makes sense to seek a suitable factoring facility.

However, if you are looking for a short term solution to a cash flow “hiccup” then spot factoring can be ideal. It means that you can factor a single invoice and once that is paid you have no contractual obligation. You can also revisit the “facility” further down the track if you have another invoice you wish to factor. In essence you can “dip in and out” as you need to.

This can be quite attractive to some businesses. So what are the down sides?

In short the interest rates can put some people off. Most lenders will quote a daily interest rate which sounds nominal. However, this can equate to an APR of circa 80%. But does this make it more expensive than traditional factoring?

Well the interest rate is 10 – 20 times more than what you will pay on a traditional factoring facility but your debt may only be outstanding for 30 days. Traditional factoring can attract minimum service fees and minimum contract periods which can mean if you have a genuine short term requirement traditional factoring can be expensive.

While rates for spot factoring may well be higher than the rates for whole turnover factoring, if you have a genuine short term requirement spot factoring will typically be your cheaper option in terms of pounds and pence!!

So is it the future? I am not sure but it is another valid solution for many businesses so it should be embraced.

As an invoice finance broker it is interesting to hear the complaints I hear from clients about invoice finance companies. Some I may add are totally unfounded and relate to the invoice finance company not agreeing to an overpayment or something that they shouldn’t have to do. However, some seem to follow a common theme and these were highlighted in a forum by the Federation for Small Business.

I want to explore some of the themes that were raised:

  • Hidden costs and unexpected fees – it would be fair to say that not all invoice finance companies are as transparent as they could be in relation to fees. We often see agreements where a minimum base rate is hidden in the small prints. Lists of dispursements are also rarely shared at first meetings which makes comparison of facilities almost impossible. On that basis headline rates can be misleading as some companies have virtually no additional fees.
  • Restrictions on funding. I think this complaint often boils down to a lack of understanding on the clients part and poor communication from the lender. It is imperative any company entering into an invoice finance agreement understand what invoices are eligible for funding. In my mind I believe that should be explained properly by the lender at the outset.
  • Termination fees. This seems to be a thorny topic at present and relates to the fees charged should you wish to leave early. The justification of these fees relates to the fact that the costs of setting up a facility are typically incurred either at commencement or even precommencement by the invoice finance company. As such it takes the contract period to recover these costs and turn a profit. Should a client look to leave early then they incur a loss. However, fees such as arrangement fees, legal documentation fees and survey fees have crept into the industry. On that basis surely the initial set up costs are paid for by the client upfront. If this is the case I am not sure early termination fees can be justified.
  • Collect out fees. This is a fee applied to the ledger upon the failure of the business. Some lenders apply a 15% fee the gross value of the ledger when the company fails. Is this excessive? In some instances most definitely. I saw a bank (one that is now government owned) charge a collect out fee on a ledger where there was actually no borrowing. The implications to business owners is often minimal and it is creditors and often HMRC that lose out on the funds being taken. However, where there is a shortfall and a personal guarantee has been given it could cost the directors personally.

I am sure that there are more complaints from many clients but overall I would maintain that the vast majority of invoice finance clients are happy. there is obviously always room for improvement.

From my perspective it just seems a shame that the same invoice finance companies get mentioned time and again and seem to become notorious for certain practices. It can give the industry at large a bad name.

Fixed fee factoring is ideal for businesses looking for a single flat monthly fee when factoring.

Research has shown that small businesses find factoring charges confusing and unpredictable. Fixed fee factoring takes away this confusion by combining all the charges into an easy to understand single monthly factoring fee. It is easy to budget for and provides a valuable boost for the cash flow of a small business.

It is ideal for a business with a fairly smooth cash flow. However, if your turnover is more variable you could find yourself paying the flat monthly fee in a month where you have not had any turnover in which case you would be paying for nothing.

An alternative to fixed fee factoring could be a bundled fee deal. This is a single fee but is charged as a percentage of each invoice with no minimum fees. It is arguably as easy to understand as a fixed fee deal but is more flexible.

Invoice finance is a form of finance that can provide valuable working capital to your business. I want to explore objectively the advantages and disadvantages of invoice finance.

Advantages of invoice finance

  • invoice finance can provide up to 90% of the value of your sales ledger and ongoing invoices as cash to use within your business.
  • this may allow you to take advantage of settlement discounts
  • if you use factoring you can outsource the credit control of your business freeing up more time to concentrate on growth
  • by taking up credit protection you can eliminate the risk of bad debts
  • an invoice finance facility should grow in line with your sales

Disadvantages of invoice finance

  • an invoice finance facility can be costly when compared to an overdraft facility. However, this is not always a real option.
  • some people perceive factoring as losing control of your sales ledger rather than outsourcing.
  • some people also feel that there is a stigma attached to factoring
  • you can be tied into lengthy contracts and notice periods which can be restrictive
  • hidden costs or at least costs beyond the headline rates can cause frustrations
  • retentions and other restrictions on the funding can also mean that the true prepayment level is not what is expected or anywhere near the headline rate

I believe that an invoice finance facility can work very well in the right circumstances. However, it is important to understand exactly what is on offer. hat means you must understand the total costs involved and also the mechanics of calculating the cash made available.

When looking for factoring advice I am always amazed at who people approach. I accept that my views may be tainted somewhat as I am a factoring broker but it is what I specialise in and I know and am 100% impartial.

Let’s have a look at who business owners will approach to obtain a recommendation for factoring:

Bank managers – your bank manager will only ever recommend their own bank’s factoring company. They are heavily targeted to sell this product so you will receive a single recommendation not taking into account what your requirement is or what the market can offer. In contrast a factoring broker can look at your requirement and recommend the lenders best placed to meet your needs.

Accountants – unfortunately a lot of accountants take commissions from invoice finance providers (as do invoice finance brokers) The problem is that accountants do not specialise in setting up invoice factoring facilities and often do not look at it as in depth as they should. They will also have a few localised relationships rather than using the whole market.

Brokers owned by factoring companies – some brokers are actually owned by factoring companies. As such guess who they are most likely to recommend? If you are using a broker at least ensure they are independent and impartial.

Brokers owned by insolvency practitioners – this may seem like a strange relationship but insolvency practitioners are keen to be appointed by factoring companies. If they can offer factoring companies new business they are likely to receive more appointments. As such you could find yourself placed with a factoring company they owe a favour to rather than the one best placed to meet your needs.

In my opinion you should be taking factoring advice from a specialist and someone who is 100% impartial and independent.

There are a lot of good brokers in the market who are specialists and totally impartial.

At Smart Factoring Quotes we are totally independent and impartial. We are also specialists as invoice finance is all we do.