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Factoring options

Two connected companies

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I have two clients, Co A & Co B. 

Co A factors their debts currently (with unconnected customer balances), however they provide Co B with goods and services but the factoring/ID co is refusing to finance these debts due to the relationship between the two companies as per the below. 

The Directors of Co A are also Directors of Co B. B has one other Director (who isnt connected to A and owns 50% of share capital). The A Directors own the other 50% of B. 

I assume the factoring company are concerned around the relationship between the two co's, and on the basis that it isnt an ordinary customer/supplier relationship they will not finance the debtors.

Are there any options here to assist Co A? The A directors are happy to resign from Co B but will still collectively hold 50% of the share capital of A

Replies (8)

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By nrw2
18th May 2022 09:08

Assuming I'm understanding this correctly, that Co A can't factor invoices raised against connected Co B, then this sounds entirely reasonable to me.

The scope for abuse is obvious: Co A raises an invoice against connected Co B, Co B approves it, Co A factors it, Co B doesn't pay.

Thanks (3)
By TaxTeddy
18th May 2022 09:45

If I were the account manager for the factoring company and I was told that a restructuring was proposed to qualify for factoring, it would just raise more red flags

Thanks (3)
By meadowsaw227
18th May 2022 10:18

Why would you even need to "factor" debts between connected parties ? .

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Replying to meadowsaw227:
By ireallyshouldknowthisbut
18th May 2022 10:28

Quite, normally the problem with factors is getting screwed over paying through the nose for finance on income on which there was little risk of slow payment. ie them taking over your whole invoicing and not just the risky bits.

I recall trying to get a new client off the drugs of factoring (hard when they are taking all your margin) and found they XXX's were taking 5% off the top on DD's collected 14 days later, and it was all in the T&C's. Absolute rob dogs. We had to negotiate really hard to get them onto another supplier and actually build an exit by only factoring part of the debt, so the (then profitable) bit of the business could build funds, to then take the rest of it of (which was then profitable) . most of it ended up about moving the billing cycle forward from a disastrous "bill at the end of the month, and maybe the following one, and don't chase anyone for 60 days" to "bill upfront, start of the month and collect by DD on the 15th". Oddly enough, factors no longer required.

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By Duggimon
18th May 2022 12:25

Why would you want to raise an invoice from one of your companies to another of your companies, then pay part of that over to a factoring company in fees? It's like withdrawing £100 form the cash machine, chucking £20 in the bin then walking into the bank to deposit the rest.

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Replying to Duggimon:
paddle steamer
18th May 2022 14:45

Mechanism for accelerating cashflow?

I once did some management accounting (monthly) for a client who was raising invoices, factoring them then next month issuing credit notes and reinvoicing with a later date etc, rinse repeat. I turned up at their premises one day to find they were no longer there. By chance part of their name was "Fabricators" which always struck me as very apt.

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By Jigs
18th May 2022 14:37

Thanks all, it is because the ownership is different between the two of them.

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By tom123
18th May 2022 14:41

There will be personal guarantees (probably) that will be put at risk by this process.

It is hard enough to get directors to keep their hands out of the factoring till as it is.

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