How can we help?

• Over 60 companies offer factoring or invoice discounting. Which one is right for you?

• We can get you a good deal quickly because we know where to go

• We offer a free independent analysis of any offer of invoice finance that you may be considering

• With our market specialist knowledge we can advise you as to whether we can help with a competitive quote from an alternative supplier.

Factoring and invoice discounting ... in great demand

A total of £77 billion was factored in 2000, twice as much as in 1995.

At the end of 2000, over 28,000 companies were using factoring or invoice discounting to release working capital from their debtors book. Factoring is used by about 7% of all small and medium sized businesses in the UK.

There are over fifty active providers in the UK of this specialist invoice finance, each with its own target market and method of doing things. We at the Banking Liaison Group can assist with independent guidance as to the marketplace, saving you time. We have clients in Germany, Switzerland, The Netherlands as well as the US market, and whilst the UK is our specialist marketplace we would be happy to talk to businesses in Europe or the States, where the factoring market offers the same benefits.

A very dynamic marketplace also sees new and established providers offering something a little different. They can generate additional cash for businesses alongside the straightforward invoice financing products. Term loans, stock finance and import finance are services offered to UK businesses by the invoice financing companies. These asset based lenders or "smart bankers" are now taking on roles traditionally handled by the High Street or Merchant Banks.

Two-thirds of all businesses which use this form of finance turn over less than £1 million. That is not to say it is just a method for small businesses to use, we have helped businesses from £50k to £800 million to find what the market can offer.

So what are factoring and invoice discounting?

How factoring works

The factor buys the invoices that you (the client) raise on normal credit terms - 14, 30, 60 or 90 days. The factor will then remit, normally within 48 hours between 70 and 85% (depending on the agreement you have) of the VAT inclusive value of those invoices. This is normally done by simple bank transfer giving you immediate access to working capital, to help you finance your business. This payment is normally referred to as a "prepayment", "drawdown" or "initial payment".

As part of the factoring service, the factor will administer your sales ledger, issuing statements and following up with chasing phone calls and letters. Most good factors will allow you some input and flexibility on how this is done, ensuring goodwill is maintained with your customers, whilst still collecting the money in an efficient manner.

When your customer pays the factor, the balance of the money (the difference between the prepayment and the full value of the invoice) is passed back to you. A form of factoring exists which will protect you, the client, in the event of the failure by your customer to pay for reasons of receivership or insolvency.

What factoring costs

Service Charge - normally between 0.5% and 3%, based on what the factor believes it will cost them to administer your sales ledger. This depends on how many customers you have and how many invoices you raise, as well as the size of your business. A facility which includes some bad debt protection (referred to above), will cost a little more.

Discount Charge - normally between 2% and 3% over the current bank base rate. This is often cheaper than the cost of an overdraft facility.

Who can benefit from factoring?

• Sole traders, partnerships and limited companies which are turning over more than £75k a year

• New start business with expectations to achieve the same level of trade in their first year

• A business needs to be selling goods or services on credit terms to other businesses

• Traditionally factors have expected to see a spread of customers, but we see businesses with only one or two customers benefit from factoring services at a reasonable cost

For & against factoring

Improved cashflow normally without any formal upper limit. The finance grows in line with your sales, unlike more traditional methods of funding , such as a bank overdraft.

Rarely do factors ask for additional security beyond a charge over the book debts of the business. Sometimes a personal warranty or full personal guarantee is required to safeguard the factor from fraud, and or, losses. This is often required in a newly established business.

Against a given level of debtors, a factor will lend up to 80% or more - a bank will typically allow 50% on overdraft [because the factor knows more about the debtors]

Debt turns usually improve when a business uses a factoring service. A good effective chasing procedure can bring real benefit to a business, which lacks the resources, the time or so often a combination of the two, to do the job themselves.

Many bank managers are pleased to see their customers are factoring. They know the value of effective cashflow can improve the fortunes, and help secure the long term future of a growing business.

Frees up management time to drive the business forward.

Factoring can be used for exports to most countries

A factor should not upset your customers - if you decide to use a factor, insist on speaking to existing clients of theirs who are similar to you [if they haven't got any, why not?]

But ...

Factors don't accept every type of debt or debtor

Your customers know you're factoring. There used to be a stigma attached to factoring, which was seen as a last resort, but no longer - use of factoring has shot up in recent years [see above]

Factoring is not the cheapest method of finance. Most businesses offset the factor's charges by adding them into their prices. The most successful generally use the cash to negotiate early settlement discounts from their suppliers - this should be an avenue to explore when considering the overall cost of such a service.

Sometimes there can be a minimum term for the contract, sometimes 1 year, or as long as 3 years. Such contracts can cause a problem if the factoring service does not bring the benefits you expect, or if your business changes course, or fails to achieve your expectations for growth.

How invoice discounting differs from factoring

Invoice Discounting offers the real cashflow benefits that factoring offers but without the need to lose control of your sales ledger and existing methods of credit control. It is usually (but not in every case) a confidential service (known as "C.I.D" - Confidential Invoice Discounting or "D.I.D."- Disclosed Invoice Discounting).

Factoring companies usually look for well-established profitable businesses with an effective and professional sales ledger administration system, before they are prepared to offer this form of facility. Generally turnover needs to be running at over £500k (and with many factors £1m) to qualify.

Service charges (often known as "commission charges") are usually much lower than for factoring for the obvious reason that the sales ledger administration is still your responsibility.

Discount Charges vary from case to case but are usually between 1.25% and 3% over base rate. Often a discounter will try to match or beat the rate currently being charged by the client's bankers.

This method of finance is becoming an increasingly popular method of financing mergers and acquisitions, MBOs and MBIs.

As mentioned earlier, Invoice Discounting is becoming increasingly used alongside stock finance, term loans and trade finance to offer a full asset based lending package. Many providers of invoice/receivables finance have brought a new, dynamic and creative set of solutions to age old problems - often with very attractive cost structures.

Stock finance

Up to 60% advance available against stock or other unencumbered assets

Level of borrowing and advances linked to Debtors.

This facility is available alongside one of the debtor finance packages outlined above.

How we can help

Factoring in the UK is an extremely competitive business. There are many factoring companies, which specialise in different areas. We can save you a lot of time in your search.

We at the Banking Liaison Group use the services of one of the UK's top independent specialist consultancies and brokers with extensive contacts in this industry. We will be glad to help you identify which invoice financiers will be right for your business. We make no charge to you for this service, but as recognised and respected industry specialists we can help you get you the very best rates and service for your business.

You don't pay us - the factoring company pays us for the introduction. And you are still getting your good terms.

Talk to us on 01707 663887 or complete our form and we will contact you.