I am FD for an 18m turnover company which is profitable but needs to raise finance for a project. Some of the Directors want to invoice discount, whilst others see it as being viewed externally that the business is in financial trouble. I would appreciate views from companies that use it, and from anyone who may have a supplier that uses it.
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Invoice discounting
I have used it many times in industry with no (obvious) side effects on external perception. Have you thought about confidential discounting, which is not revealed to the outside world but is only available if your references are good. I woud also try for non recourse and insist you do the the debt collection as this maintains the contact between you and the customer
Hi...
I agree with the previous answer, confidential invoice discounting would be the best way forward for you.
These days most lenders prefer asset backed lending and with C.I.D you retain control of your debtor book and the responsiblities of collecting the debts. It is also cheaper than traditional factoring.
Depending on your business sector and the amount of funding you require may dictate which lender you approach. If you need any help please do not hesitate to contact me or look at http://corporatefinancebrokers.wordpress.com/company-funding/invoice-finance/
One way street
Another point to consider is once the factor has their hooks into you, it is unlikely that the company will ever escape them. The banks tend to be highly reluctant to lend money to companies using it, especially if it is that banks own factoring service.
Factoring
I'm very sceptical of factoring. I had a client who went for it and it was quite a lot of hassle. The extra cashflow at first was good, but EVERY invoice had to go through the factors, even the regular good payers. And the credit control done by the factors was very half-hearted (and I've noticed this from all major factors used by a variety of suppliers). Furthermore if the debt goes more than 90 days old, the buck gets passed back to the company and they have to reimburse any cash advance on the invoice.
Factoring
To my mind factoring is the commercial equivalent of pay-day loans. A last resort for the desparate, and that is the impression it gives customers.
Simply beef up your own credit control.
Difference
For me there is a massive difference between, say, factoring where a business simply can't or won't collect debts and are simply robbing Peter to pay Paul, and a situation where you have a growing company with a naturally long working capital cycle which could stunt growth. Confidential invoice discounting is a good product in the right circumstances, the discounters name won't appear on invoices, and if you go with the right provider the charge that is registered at Companies House won't give the game away to people doing background checks.
Generation gap
In the early years of factoring, which were my formative years in the industry, I came to the conclusion that it is usually the start of the end for businesses.
However, experience has shown me that it can be a vital tool in raising finance and is too easily dismissed. Particularly useful for businesses paying for supplies up front, eg importers from China.
I have just finished the audit of a £20m + turnover business with profits approaching £1m before tax - they use invoice discounting and have found it an excellent use of finance, especially when you insure the debts.
Factoring
Although I agree with all the negative comments made by Monsoon, I do have one client who uses his bank's factoring system and this has enabled him to maintain his cashflow well. He is happy with the service they give him.
I think it is important to use the right factoring method/company for your particular business and this is the only client I've had where I think factoring works well for them.
It would be worth talking to other companies connected with your industry before making any decisions.
No, No, and thrice No
Over the years I've been in practice, I've come across quite a few businesses that have gone down the factoring/invoice discounting route in order to help cashflow.
They've all subsequently gone bust.
Factoring certainly gves an immediate cashflow boost, but I wonder if there are fundamental problems with these businesses which factoring merely disguises, and ultimately just delays the inevitable.
So I would look inside the business and correct the internal problems, rather than factoring.
Open your eyes
Geebee - it must be that it was taken up for the wrong reasons or a reflection on your client base.
Invoice discounting has its place - as I say, take a situation where you order from China. In month 1 you place your order and pay 50% up front. By month 3 you should have your stock, pay the other 50% to get the stock released. Month 4 you sell the goods, and get paid in month 6. That is 6 months before you see the money.
I used to share your opinion, but with good profitable businesses it can be a good source of finance, rather than the last resort it used to be.
Horses for Courses
Factoring has its place in cashflow planning, but I believe all funds raised should be strictly directed at Current Asset/Liabilites. Factoring is short term debt and should be used as such. It's availability and required repayment are dependant on your existing business. Using Factoring as a means of raising Capital Funding for a project does not make sense. You need to be able to tailor the repayment of the Capital (plus interest) to your returns from new project. If your company is genuinely able to carry the cost of financing the new project other sources of finance should be sought first.
Factoring, Invoice Discounting and Asset Based Lending
Let's focus on some facts.
These forms of working capital funding are used by over 40k companies in the UK, from small busineses (sub £250K t/o) to global scale (>£250M). c£15Bn is currently being advanced to these users from around forty providers ranging from high street banks to niche players. There is wide market choice and competition.
They are generally more suitable for businesses with simple identifiable products and services, rather than for those with complexities such as stage payments, set offs, liquidated damage contracts etc.
They cannot/ will not stop a failing business from collapsing (but used judiciously may create time for a turnaround solution to be put in place). They are not a panacea.
They are however highly suitable for businesses that need working capital to grow, especially those that are unable to source sufficiently from traditional lending sources (for reasons e.g. of lack of equity, retained capital, low fixed assets, track record).
The facilities are generally flexible and usually light on covenant.
The particular solution is dependent on a particular company's needs. One size does not fit all. Costs reflect the differences in services required.
In the EU27 in 2010, just under one trillion € of turnover was handled by the Industry (yes, that's 10^12€) and grew by 17% in volume. This is a serious industry for serious businesses.
If you want to know more, please talk to me.
John Brehcist
Two desperate clients
I've only had two clients get involved with factoring / invoice discounting in the past 5 years.
Common factor = desperate measures to improve cashflow (worked short-term).
Common factor = a very costly way of borrowing
One client went bust within a year of entering factoring arrangements (I'm not sure how much the high costs of factoring contributed to the bankruptcy but suspect that a basically under capitalised financially under-performing business was also a factor).
The other client company managed to extricate themselves from LloydsTSB's costly factoring arrangements (after just a few months) and now continue to trade successfully without the high costs of invoice discounting / factoring. Factoring as a temporary arrangement provided, at a high cost, a remedy to a temproray cashflow situation.
Whenever I see factoring my first thoughts remain, following the above a previous experiences, "here we have a financially desperate business". This may be described by those in the industry as short sighted, but in my experience a very true situation - no one in their right mind goes into costly arrangements like this unless they have no alternatives.
CID
I'm surprised at the tone of the comments - Confidential Invoice Discounting is no more indicative of problems than using a bank overdraft. In fact bank's prefer it (and press for customers to use it) as it gives them better security over the book debts than an overdraft.
There are some practical points:
- it will require some administrative effort to fully control the various ledgers and records required by the bank
- you will never be able to fund the theoretical maximum offered by the bank because of the reserves they will impose for credit notes, contras, concentration and the few days it will take to get the money.
- it is not very suitable for cyclical businesses as the availability under the schemes will disappear just when you need it most
- if you have a regular order and delivery cycle, it means that you will be able to predict future cash availability when you receive an order which is a great help in planning payments