FACTORING
Q: What are some of the common causes of poor cash flow?
A: “One of the most common cash flow issues affecting businesses is extended payment terms which cause firms to struggle to bridge the gap between goods being shipped to customers and payment being received.
“Many companies also operate in seasonal markets and the need to build up a strong inventory of stock in time for peak trading times can also stretch cash flow.
“Coming out of a recession potentially presents an even greater risk as businesses can be anxious to make up any shortfalls during the difficult times can develop a tendency to overtrade, which also negatively impacts on cash flow.”
Q: How can factoring improve cash flow?
A: “As a flexible form of finance, factoring advances money to a company as and when it issues new invoices. Lloyds TSB Commercial Finance, for example, advances funds of up to 90 per cent of the outstanding statements, normally within 24 hours.
“Factoring is capable of bridging the gap between taking a customer’s order and receiving payment, enabling a firm to vigorously pursue new opportunities without worrying about the impact on its liquidity.
“The amount that can be borrowed grows directly with its sales, so that the more trading success a firm enjoys, the more funds can be released to pursue new expansion opportunities.
“This helps management teams to concentrate on their long term strategic objectives rather than the day-to-day management of the sales ledger.
“Factoring also reduces the administrative burden by building in a credit management function - issuing statements and reminder notices to debtors on a business’ behalf.”
Q: Who can offer this service?
A: “Factoring is provided by dedicated teams at most major banks, as well as a number of specialist invoice financing companies which offer factoring alongside invoice discounting facilities.
“Lloyds TSB Commercial Finance has maintained a leading market share of 23.7 per cent in terms of client numbers, according to the latest (Q2 2010) Asset Based Finance Association figures. It has specialist teams all over the UK, including the Isle of Wight, offering advice and competitive packages.”
Q: What types of business would you recommend it to?
A: “Invoice funding, like factoring is suitable for firms of all sizes, across all sectors.
“Factoring is increasingly being utilised by new businesses, as the lending facility is based on the strength of a firm’s current sales, so it does not require a company to have been trading long enough to have produced its first set of accounts.
“The facilities are also suitable for larger, more established firms as borrowing rates are usually less than other forms of business funding, providing a cost-effective way to quickly boost cash to drive growth strategies. Factoring and invoice discounting can also be used to finance company mergers and acquisitions.
“For any business that does not have access to an in-house credit controller, factoring is ideal as it has a credit control function built in to the facility to liaise with debtors on the firm’s behalf.”
Q: What are the benefits of factoring?
A: “The biggest advantage of a factoring facility is its flexibility and speed. To enable a company to capitalise on demand, it provides a quick boost to cash flow and capital is available as soon as an invoice is raised to finance the next orders and. The funding also grows in line with a firm’s sales ledger, meaning the business is not restricted by the amount it borrows.
“With factoring in place, management can take advantage of a smoother cash flow and implement long term growth strategies which would be difficult to execute with capital tied up in unpaid invoices.
“Many businesses utilise factoring to free up management resources and concentrate on expanding the company.”
Q: What are the disadvantages of using factoring?
A: “Although the facilities’ built-in debt management function is a benefit for many firms, it is essential to tread carefully when choosing which provider to trust with this responsibility.
“Chasing invoices from valued customers must be treated sensitively and professionally as it reflects directly on your business’ reputation. Therefore it is paramount, when considering a factoring facility, to choose a well established and highly regarded company which will look after your firm’s best interests.”