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Which is the right factor for my business?
There is no hard and fast rule as to which factor is the better company to use when looking at invoice finance. There are some very good, competitive and flexible providers to choose from. This said not all factors are the same and they
can differ greatly in some fundamental areas which may affect your decision in choosing a factor or how well the facility will work for you and of course, importantly, how much it will cost. For example if your company turnover is
particularly concentrated to one or two customers some factors may be unwilling to provide a facility or restrict the finance that they will make available. If you have export customers, if you are involved in contractual work, require
bad debt insurance cover, have perhaps had a recent difficult financial trading period, require flexibility in the funding parameters applied or to the credit management service provided and many more. Deciding on the right factor to use
can often require a lot of time being invested and a number of 'dead ends' pursued as a result of one or a combination of the above.
Is the answer then to simply use the factor allied to the bankers of your company? Clearing bank owned factors are generally reasonable at providing invoice finance competitively, often though their weakness is the flexibility of their
criteria or their financial overview or hurdles applied to your company. It should be noted though that the majority of these are independent companies within the particular bank group and your invoice finance facility will often be
managed by a new relationship within a new, to you, company. Continuity of your current bank relationship is often not as you may expect and may be no better than choosing an independent option. Also alternatively you may wish to
split your company's funders concerned about 'eggs in baskets' and not concentrate your suppliers of working capital as you perhaps wouldn't with your customers.
The options available to businesses are wide. As each business in the UK differs in the nature of what they do and in the relationship and terms of trade with their customers so can the criteria applied by different factors.
Consequently it is important to choose the right factor for your business, not the right factor according to you bankers or according to any other business.
Blue Asset Finance seeks to assist you make the right decision by considering the widest options and ensuring you consider all relevant issues given our unbiased and independent position. After all, your supplier of working capital is
potentially your most important supplier and can significantly affect the future performance of your business. Let us do the work for you, consider all options and ensure you are best informed to make the right choice.
Is invoice finance expensive?
The likely cost of invoice finance for your business may be very different to that of another. Do not assume the cost of invoice finance without checking, you may be very surprised.
Use our Instant Quote for an approximate indication, although better still let us obtain figures for your particular business directly from a selection of factors, by using our Invoice Finance Search.
Costs are of course relative to benefit and the benefits of invoice finance are significant for most businesses. Only you though as a business manager can answer this question. It is possible that invoice finance might cost you
more in 'headline' amounts than an overdraft facility that you may have been using. But, as an example, if your bank won't increase this to a level that you need then the extra funding that an invoice finance facility will provide
and how you use those funds could prove profitable in itself.
In short consider the whole picture. What savings will you make in not using an overdraft? What will the extra funding allow the business to do and what additional profit will this bring to the business? Can I take advantage of
supplier discounts given the improved cash position? What efficiencies and savings will factoring bring to my business? Is there a benefit in a reduced risk to the directors in not having to provide personal security to support
the business? Please see What does it Cost? within the product guide.
Consider all points and then make an informed decision.
What can I use the finance for?
Factors will not dictate to you how you use the finance that your facility will generate. Naturally the primary reason is increased working capital to finance the operating cycle of your business. You may though be moving
premises and whilst funding the property by long term loan require increased finance for the move or to raise a deposit stake against the property. You may be seeking to make an acquisition, your may be seeking to use the funds to
effect a management buy out or acquire another directors shareholding.
There is no restriction. You manage your business and the factor will not interfere in how you use your cash resources.
How soon will finance be generated against my invoices?
Funding will be generated against your sales ledger outstanding at the commencement of your invoice finance facility. This will give an initial injection of finance.
Thereafter available finance is created against invoices as soon as they are notified to the factor. If you are notifying by postal returns then this will be upon receipt by the factor. If you are using an on-line system then
if this is a 'real time' system new availability is often created immediately. If this system updates overnight then it may be the following day.
Once using invoice finance how easy is it to get out?
Most invoice finance agreements are for a minimum 12 month period and thereafter a notice period generally of either 3 or 6 months is required by you to the factor, of your intention to terminate your agreement.
Reversely, unlike an overdraft facility which is repayable upon demand, a factor will need to likewise give you notice as above if they decide they can no longer support your business. This gives you time to find an alternative,
more suitable provider.
Do I have to factor / discount all of my customers?
Most providers operate on a whole turnover basis. You will be asked to notify all sales with the exception of those agreed by the factor, i.e. cash/proforma sales, although most factors are happy to discuss a degree of flexibility.
Blue Asset Finance can guide you, should you wish, to providers of selective invoice finance, although you should consider this further.
If your thoughts in this respect is to reduce costs, then often a whole turnover agreement will cost little more than a 'specialist' selective facility. Especially in the case of invoice discounting.
If you have one or two customers that you really don't want to include within a factoring facility, then it is often possible to exclude some. Alternatively with the right factor you might agree with them that they will not chase
overdue payments with these particular customers (if this is your concern) and leave this to the company, but still provide finance against their debts.
Particularly with factoring flexibility in the credit management service is important. Some factors are more flexible than others.
What will my customers think if I start factoring?
Factoring has been provided in the UK for over 30 years and particularly within the last 5-10 years the popularity of this means of finance has substantially increased. The belief that your customers will react negatively to you
factoring is perhaps occasionally perceived more than it is actual today. Given its popularity factoring is a very common business tool of both successful and less successful companies alike and in our experience rarely does this
cause any real issues. Those that may object may of course not wish to have to pay you within a reasonable time? If you have any customers that you are though particularly concerned about then talk to the factor, exceptions in the
agreement or the collection process may be adjusted for this particular customer.
In short though, if still concerned about their reaction then why not consider asking them?
Is there a stigma attached to factoring?
It is fair to say that you won't be the first business manager to ask this question, many of whom are now successfully using factoring to advance their business. Its roots lie in the past and in particular the 80's, when factoring
was used more so by businesses that could not acquire traditional bank funding. The key benefits of factoring have since been well documented and championed by all the leading UK clearing banks, the Bank of England and a variety of
business and professional federations. Factoring has increasingly been accepted as growth funding and the contracting out of credit control like other business services is also far more popular.
Also see What will my customers think if I start factoring?
Will the factor take over my credit control and do as they please?
This is not relevant of course to invoice discounting where the company maintains their own credit management. With regards to factoring then, no, not if you choose the right factor. A concern of any business is the handing
over of customers for a factor to send out letters and make phone calls at their will. Any good factor will allow you to adapt some flexibility to the credit management process. Factors refer to the cycle of reminder letters and
phone calls involved in the credit control process as the 'dunning cycle'. A good factor will allow you to tailor this. For example, have your customers receive their first reminder letter say 7 days after due date, first phone
call after say 14 days etc and also set up one or two customers who may have a different dunning cycle to your standard arrangement.
Blue Asset Finance can advise you on the factors that will give greater flexibility in this area.
What can I do if I am unhappy with my current factor?
We would firstly advise you to speak with the Client Manager who looks after your account at your invoice finance company. It may well be that the matter can be easily resolved. Blue Asset Finance of course, using our free advice
service can give you an independent opinion on any problem that you may experience.
You can of course also speak with other factors. The problem you have may be specific to that particular factor. Your debtor profile, nature of business etc may have changed and may better suit a different factor with a
different approach to the matter that concerns you.
Can I move from one factor to another?
You can move to another factor at any time, although there may be early termination charges should you choose to leave before the end of any minimum period or termination notice period.
With the increase in the number of providers of invoice finance in recent years there has also been an increase in companies switching factors to take advantage of better terms, costs and service. Subject to notice periods,
which should be clearly detailed in your invoice finance agreement, the change from one factor to another is generally very straight forward. The new factor will complete all documentation with you prior to leaving your current
funder and on an agreed date pay the outgoing factor the balance that you owe them. From this point on you will notify new sales to the new factor and draw funds from them. With factoring your customers will be informed by the
factor of the change of payment details.
Will I upset my bank if I use a different factor to theirs?
It is important that you decide on the right factor for your business.
Bank owned factors generally have a much more selective approach to the criteria they apply to invoice finance and it may be that their facility is then is not suitable for your business or they are unable to assist at all.
In these instances your bank manger may well still be happy to see you use another factor if this is the right option for your company. He/she will though of course like this, for their own benefit, to be a factor not
allied to another clearing bank, fearful of any approach that bank may make to you regarding other services in the future. You of course may be happy with this in the hope that he/she then 'keeps their pencil sharp'?
It is perhaps not always understood, but the majority (not all) of bank owned providers of invoice finance are simply a group company of their parent bank. Should you choose to use their service, invariably this will be
the start of a new relationship, with a new account manager, with a completely different credit department to that which you may have dealt through for a number of years.
Banks like most companies are sales organisations and each bank manager will be targeted and rewarded for referring businesses to other group companies, including that of invoice finance. Your manager will therefore
gain personally by encouraging you to use the bank's invoice finance provider. That is not to say that this may not be your best option. It pays to consider various options
and then make a 'best informed' choice.
My bank have mentioned 'Brumark' and suggested I should use invoice finance. What is this?
'Brumark' is a much talked about issue within the banking and finance industry in the UK and is increasingly quoted by bank managers as a reason why they are now unable to provide overdraft lending to a variety of businesses.
J S Brumark was a legal case in New Zealand whereby the Inland Revenue challenged the accepted belief, established by the legal case of New Bullas Trading 1994, that a lender with a registered fixed and floating charge
(debenture) could assume a fixed charge was held over the company's debtor asset.
In a particular case the Revenue challenged this view, where the lender, Westpac Banking Corporation, held a debenture within which the principle company asset was the company's book debts.
Under a fixed charge over debtors Westpac would be the primary creditor, under a floating charge Preferential Creditors, being, the Inland Revenue, National Insurance, VAT, pension costs, staff pay and receivers costs would rank first.
The decision was ultimately ruled on by the Privy Council in New Zealand. It was concluded that given the financial institution had no direct control over this asset it could not effect a fixed charge but the debenture would create
a floating charge only over debtors.
The resultant effect of this is that banks that have previously assumed a degree of security value in a company's book debts under a debenture now have had this significantly eroded and are now in a more
exposed position than they considered themselves.
It is unlikely that much value will remain in debtors after the above preferential creditors have been paid.
Decisions of the Privy Council are not binding in the UK but since the judgement is that of five English law lords the opinion of the court must be regarded as pretty conclusive and has become accepted legal opinion in the UK.
Therefore then it has become increasingly common that upon annual review of company's overdraft facilities banks are requiring additional tangible security from the company and its directors simply to maintain the
existing level of lending let alone increase the facilities.
Invoice Finance has benefited considerably from this. Given that a factor can demonstrate control of the debtor assets, principally given debtor receipts are banked into an invoice finance trust account, the factor can effect a fixed charge and
hence rank above preferential creditors. This is true of both factoring and invoice discounting.
Will I have to employ someone to manage my invoice finance facility?
No. If you find that you are increasingly spending more time on providing a factor with information or doing the job of credit control yourself despite using a factoring service then you should review your current provider.
Most invoice finance facilities should prove simple to manage and in the case of factoring provide your business with time and cost savings in respect of credit administration and management.
Under a factoring facility you will be required to notify new invoices to the factor. This will be either through copies posted to the factor or through an on-line link.
With invoice discounting you will be requested to notify sales, receipts, credit note and ledger adjustments to the factor. Often these are total values only and in a large number of instances can again be done through an on-line link.
This should all prove very straight forward.
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