Invoice Factoring

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Tan

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Hi

As some of you may be aware, I recently started my own business. I have heard about Invoice factoring as a way of taking away the risk of invoices not being paid.

Does anyone use this method and is it good and who would you recommend to use?

Many thanks

Tan
 
Will the factoring unit need a history of invoice default before agreeing terms for the risk?

How does that work if the business is fairly new? HD
 
I know factoring works well for some people but there are charges to pay for the service. However, using the factoring will help cashflow and thus hopefully avoid other banking charges.


I have several large banking customers and when I'm on site for one bank in particular, different members of staff always seem to ask me if I'd lie to factor (the incentives for them to get someone on board are pretty attractive).

I have always avoided factoring due to the fear of the bank upsetting one of my customers - I know when one of my suppliers used to factor, the factoring company were very keen to be paid quickly.

We have quite a few 90 day payers and one petroleum giant that uses a large FM company to manage its projects and the FM company has standard 4, month payment terms and I doubt that the factoring would work in such cases.

I know it's not easy for a fledgling company or even established ones get paid on time these days but if you can organise a good credit control system and maybe target prompt paying customers you would save on the factoring costs.

That said, I spend a lot more time "credit controlling" these days than ever before. People seem to ducking-and-diving a lot more these days.
 
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Hi

As some of you may be aware, I recently started my own business. I have heard about Invoice factoring as a way of taking away the risk of invoices not being paid.

Does anyone use this method and is it good and who would you recommend to use?

Many thanks

Tan

NO!

On Monday I will be filing a small claims track writ against Virgin on behalf of my mother.

Long story short they unilaterally cut her services (breach of contract) new years day, then continued billing.

Eventually sorted it with their head of revenues, who agrees in writing to refund her £300 within x days.

x days have passed and no sign of the cheque.

To add insult to injury, she is getting threatening letters from Moorcroft Debt Recovery.

If Virgin did not completely torpedo their reputation with OUR ENTIRE FAMILY by failing to reimburse as agreed on time, they certainly sealed their fate by letting Moorcroft loose on a debt that never actually existed, except no doubt in some arcane internal electronic accounting ledger which automagically triggers factoring / debt collection, etc etc.

Bottom line, if you don't trust people to pay you, don't work for them without cash up front.

When I was in a business that involved large capital outlay or large bills, and customers demurred at my standard "pay in full on completion" terms where "on completion" means before close of business that day, I would just sit down and ask them how long they wanted this loan for, if I wanted the job, or asked them why I should lend them money if their bank wouldn't, if I didn't really want the job, and add 25% to the fee.

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result, never had a bad debt in my life...

had one guy try it on once, next day I nailed a writ to the mast, vessel impounded, everyone ejected by the law, very public, suddenly his bank had the cash to settle the bill within literally 30 minutes, that just the day before was going to take at least 30 days to clear... funny that.
 
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Invoice financing can be very expensive and the factors can be pretty useless at collecting the money. Usually when the debt becomes difficult they hand it back to you but still expect their cut when you collect. I tried factoring with RBS a few years ago. They were incompetent to say the least. When I decided not to bother after spending £18K on the service for a year they tried to levy a severance charge of around £15K. I told them to 'go away' and not bother me again. I would never recommend factoring based on my experience. It releases money quickly but its like a drug and the hidden charges are costly. See if you can find another way. Invoice discounting for instance, offer the option of a 3% discount for immediate settlement of bills by your clients.
 
Personally I'd avoid factoring, it works out cheaper to get an overdraft and credit check your customers thoroughly.
 
Factoring is just a loan by any other name. But because the credit risk the bank assume is that of your customers rather than you, and is therefore unlikely to be individually assessed, the costs of the credit will be significantly higher - from the banks' perspective they could be taking on the trade debt equivalent of sub-prime, and rest assured they will not lose money on the deal!

Even if your debtors are fantastic and pay promptly, factoring will still involve you in more hassle and admin than collecting the money yourself. As others have indicated, look at any/all other sources of working capital before going down this route.
 
You need to be very careful about this for the reasons already stated.

The real bugger is that it if strapped for cash it can in practical terms be difficult to stop doing business with a particular Factor quickly (even if they are useless, causing problems with your customers or you just hate their guts) because you will have to pay off the advances they have given on your invoices if the customer has not stumped up yet.

They know that and trade off of it accordingly. Which explains many things.
 
We set our business up in 1990 and used factoring from day one. Two main reasons, the first being cash flow, we get 90% of invoice value less factoring costs next day. We can then pay our suppliers early and obtain any discount they offer for early settlement. Secondly, the factoring company sends out monthly statements and chases the debt, this negates the need for us to hire an accounts/admin person to do this. The costs are 2% or £3000 per annum whichever is the higher plus somewhere around 2% over base for the money lending side, much lower than overdraft rate which may be as high as 8 or 9%. When your client then pays you get the 10% available on your ledger if you need it. I would recommend using it, but use it properly otherwise it can be costly. We have never had a problem with them contacting our clients, and you must bear in mind that they will speak to your clients accounts dept not your clients buying dept. When it comes to threatening letters, you will be the one who decides what level of letter is sent and whether you need to go further. If you have the time to obtain the enquiries, sell the goods, raise the invoice leave it a month, issue monthly statements, chase the debt, etc etc then factoring is not advisable. If, like most self employed you only have time to sell, then factor. You do not have to factor all of your sales ledger, clients who are vary safe and quick payers, we do not factor and if the factoring company asks why these accounts are not factored, just tell them you carry out reciprocol buying and selling from them, theri money aint safe then:)
 
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One of our suppliers has just started using Bibby's.

They are a real pain in the ****. Hectoring us from day 1. Letters, phone calls, faxes constantly. The account is not overdue although they have decided it is. Invoice raised on us on 7/5/10, which would be payable 30 days on month end. However they have decided it is 30 days straight, and the calls, letters have started with a vengeance.

I can't see us staying with this supplier beyond the end of this month, which is a shame, but I can't be doing with this hassle.
 
One of our suppliers has just started using Bibby's.

They are a real pain in the ****. Hectoring us from day 1. Letters, phone calls, faxes constantly. The account is not overdue although they have decided it is. Invoice raised on us on 7/5/10, which would be payable 30 days on month end. However they have decided it is 30 days straight, and the calls, letters have started with a vengeance.

I can't see us staying with this supplier beyond the end of this month, which is a shame, but I can't be doing with this hassle.

Surely worth a phone call to the supplier though. If no one tells them what the 'customer experience' is they may not know.
 
You do not have to factor all of your sales ledger, clients who are vary safe and quick payers, we do not factor and if the factoring company asks why these accounts are not factored, just tell them you carry out reciprocol buying and selling from them, theri money aint safe then:)

hmm, remind me, who hired who???
 
hmm, remind me, who hired who???

Not a question of who hire who, too easy, many factoring companies insist on all sales ledger going through their system, helps them to keep a check on your strength of business and ultimately the safety of their money.
 

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