June 2, 2015
"Myth" – a widely held but false belief or idea.
Plagiarism is often the best form of compliment so it’s worth saying that the Factoring Myths below have been discussed in articles and forums before. We aim to bring these together in what we hope is an interesting read, with a Pulse twist, which may be used in conversation to dispel these myths when brought up in future conversation.
Factoring has been disguised under different names and terminologies for as long as we can remember. Today invoice finance is the commonly used name which covers both invoice discounting and factoring. We’ll save our readers the pain of defining them on this occasion.
Today factoring is a mainstream product for thousands of businesses in the UK but in some quarters there still appears a reluctance to embrace the service seemingly due to a lack of knowledge and understanding, and perhaps also some uncomplimentary press coverage over the years.
There are several misconceptions raised when discussing factoring and these are sometimes voiced by the very accountants that are advising SME’s.
"Factoring! That’s for companies that are about to go out of business"
In the breakthrough days of factoring, most businesses were financed through their local bank branch often by overdraft facility, in the days when close personal relationship with the local bank manager were common place. At that time factoring may well have been used as a last ditch effort to refinance business with debt issues, which sometimes worked, but at times didn’t.
The drive to reduced costs and centralisation took this very important player out of the market. However, the banks through their subsidiaries were sharp enough to identify the effectiveness of factoring as a style of borrowing with the real time book debt security to cover the risk. The independent factor took up the mantle to offer a high service led offering, and today there are a range of services, with different levels of service used not only by companies that require the day to day working capital to bridge the gap in the cash flow cycle but also for those companies needing to shorten the payment cycle to ease creditor pressure to pay on time.
"I can’t factor my debt because my customer has a ban on assignment clause in their terms and conditions"
Some businesses, especially in Government & Construction industries subject to a contractual arrangement include a standard ‘Ban of Assignment’ clause which advises that you must first seek written permission to ‘assign’ any part of the agreement or benefit of the agreement (payment) to a Third Party. This clause is not directly aimed at the factor to which invoices are assigned but more outsourcing works to a third party which may in some way be a benefit to a competitor to your customer. It is often the Company’s relationship with the debtor that will decide if that debtor is happy to work with their supplier to provide a benefit to both parties, and in general, if tested, reluctance from debtors is rare and can usually be managed by being proactive with them. There are of course, exceptions to this, which is why Pulse, when structuring deals, will make exceptions and run some debtors on a confidential basis, more often in within our Construction Finance Service.
"Factoring is expensive"
We regularly write articles on pricing and value for money, and the service we run not only reflects the risk of the money we provide, but also the extensive service we offer to ensure that cash flow is smooth and the level of financing is not restrictive because of credit limits and other issues. The above statement is still, however, all too common, until the business owner is guided towards looking at cost versus benefit.
In comparing facilities from different factoring providers, the most important point to remember is what you are comparing, and the way different providers earn their fees through multiple levels of charging or one simple fee (the way Pulse charges). The headline service rate is not the only fee that should be considered when comparing charges. It is important that the financier discusses with their client to identify possible cost savings such as supplier early settlement discounts that could potentially cover the cost of a facility. Of course, improved average debtor days as a result of professional credit control, will also release cash into the business and make the facility more cost effective. The feature of Your Pulse in February 2015 on Outsourced Credit Control puts these cost savings into perspective. (The article can also be found on our web site under Latest News February archive).
"Factoring Companies are just Debt Collectors"
Even now it is amazing that many businesses do not have a dedicated resource for chasing past due accounts; it is common that the Business Owner is also the Sales Manager, the Office Manager and the Delivery Driver. The first thing that we at Pulse look at is an open item sales ledger, and it is not rocket science to identify that some may need a ‘bit of work’ to first bring the past due items down to a workable figure, and secondly bring the average Debtor days down to improve cash flow. A proper credit control strategy will be discussed and agreed with the business owner. It’s not about hounding customers; it’s about delivering an on-going expectation to pay on time.
In a fast changing financial environment with new lenders coming in to the market with new services, it is important that professional advisers, accountants and introducers have the necessary resources and information to hand, so that their clients can find the right home for their needs at the time. Hopefully, you are armed with the knowledge to dispel at least few of the myths that surround factoring.