Cash in your bank - not your customer's bank

For companies that sell their goods or services on credit, the required 'investment' in debtors can be one of the biggest strains on working capital. 

Short credit terms and efficient credit control procedures can go some way to solving the problem.  But to really gain the maximum benefit from your debtors, you should consider using a Factoring and Invoice Discounting arrangement. 

In its basic form, such a facility will allow you to borrow up to 90% of the value of an invoice, on the day that the invoice is issued to your customer. The balance 10% is then paid to you, less the factor/ discounter's charges, when your customer pays the invoice.  Charges comprise of two elements - an interest charge for borrowing the money and a service charge for providing the service.

Although historically regarded as an expensive lender and a last resort, Factoring and Invoice Discounting is now a much more 'accepted' form of business finance.  Helped by recent legislative changes, banks are now much more likely to offer you a Factoring or Invoice Discounting arrangement rather than an overdraft facility, and the number of businesses using these facilities is on the rise. 

In June 2007 48000* businesses were using this type of facility compared with 32000* in June 2004.  During 2007 the largest growth in use of facilities occurred within turnover bands of £1m - £5m and £10m - £50m.

There are now approximately 60 providers of debtor finance, so competition is fierce and the previous allegation of the facility being expensive is rapidly disappearing.  Interest rates are comparable with traditional overdraft rates and service charges are constantly reducing.

As with most business finance, the High Street Banks dominate the market, but there is a vibrant 'independent' market who generally provide a more flexible facility at a lesser cost than the banks.  The new providers are keen and innovative, and constantly look to differentiate themselves. 

Just recently, one provider has launched a "fixed price service" based on the business turnover falling within certain bands, and other providers are now stretching their lending remits by providing facilities against stock and plant and machinery, in addition to the debtors.

The process of securing a facility is a simple one, but the paperwork involved is detailed and quite complicated.  Anyone seeking a facility for the first time would be best advised to take guidance from an independent broker.  Agreements are invariably for a minimum of 12 months so it is imperative that any facility is set up correctly from the very start.

If you are an existing user of Factoring or Invoice Discounting and would like to review your facility, or perhaps you are exploring it for the first time, then Spiral can help.  We can introduce you to specialist finance organisations who can advise on the best arrangement to suit your circumstances.

If you are interested in a free, no obligation discussion with one of our preferred providers, contact us.

* ABFA Stats June 2007 - www.abfa.org.uk