Cashflow Finance

When you are starting or building a business, cashflow is critical. The more business deals you do, the more cash you need to finance the growth.

Even potentially successful businesses have failed due to not being able to pay the bills. This is usually significantly prevalent where you are purchasing stock or materials and extending credit to your buyers.

This is why business owners ask themselves "My business is profitable yet why don't I have enough cash to finance it ?"

The technical term for this is 'OVERTRADING' it simply means that the actual cash coming into your business bank account isn't enough to run the business. Is usually accompanied by a large and growing order book and a growing debtors book (ie customers who owe you money)

There are three main ways of helping to improve your cash inflow

• Getting a bank overdraft

  This will mean negotiating with your bank manager and providing detailed cashflow and business forecasts. You may not want your bank manager to know you are struggling for cashflow. Taking this route may mean that you will not have access to this route at a later date if you need some short term finance

• Finding an investor

  Having worked hard to build a potentially successful business are you ready to share it with someone else, or sell a share at an early stage which may not reflect the true potential value of the share.

• Factoring or invoice discounting

  With this method you can raise finance against the money owed to you by customers. This avoids costly business plans and loss of potential share value.

A Brief Description of Factoring

Factoring is best described as receiving finance against the security of trade debts. Factoring can also provide a sales ledger and credit control service with, if needed, bad debt protection.

Factoring is only suitable to companies who are trading business to business and who offer goods or services on credit terms. By providing up to 85% finance against invoices factoring can fill the gap between the raising of an invoice and getting that invoice paid. It can be critical to an expanding business in providing sufficient working capital to meet the cashflow requirements.

Factoring is an acceptable alternative to a bank overdraft, with the added benefit that it does not need to be constantly reviewed as can happen with an overdraft. Instead the facility is a percentage of the value of outstanding trade invoices - as more invoices are raised more finance can be made available to the business.

How does it Work?

As an invoice is raised it is assigned to the factoring company. The original is sent to the customer in the normal way and a copy is sent to the factoring company (THE FACTOR).

When the invoice is accepted the 'factor' will make available the agreed percentage of the value of the invoice. This can be taken as and when required. Depending on the type of arrangement entered into, the factor would then be responsible for recording the invoice into a customer account within the factor's sales ledger. The factor will send statements of account to the customer and collect payment when it falls due. As the initial payment is at a pre-agreed percentage (not normally more than 85% of the value of the invoice) the remaining sum will become due to your business either when your customer pays the factor or at an agreed maturity date.

Types of Factoring Facility

• Confidential Invoice Discounting
  The provision of finance against security of trade debts of up to 85% of the value of the sales ledger. The trade debtor (customer) is unaware of the arrangement, no disclosure is made and you (the business) continue to have the responsibility of payments collection on behalf of the factor. When received you pay these monies into the factor's bank account.
• Disclosed Invoice Discounting
  Also referred to as 'Agency Factoring', with this notification of the factoring is made to the debtor by way of an assignment clause printed on the invoice. As this gives the factor greater security than a) above there is more flexibility for factor to decide the level of funding.
• Recourse Factoring
  As 'Disclosed Invoice Discounting' above but the factor being responsible for the administration of the sales ledger and the chasing of overdue payment. The most common form of factoring arrangement, by outsourcing this function it can free-up valuable management time, allowing the business owner to concentrate on the development of their business. 'Recourse' means that if the customer fails to pay the invoice after a set period of time the factor will require any funding provided against that invoice to be repaid by its client - normally recovered from later invoices.
• Non-Recourse Factoring
  As 'Recourse Factoring' above but with bad debt protection provided by the factor. This is normally based on limits set by the factor per debtor dependent on the credit worthiness of that individual debtor.
• Maturity Factoring
  Works on the basis of the factor guaranteeing to make full payment of an invoice after a set number of days from the invoice date, regardless of whether the debtor has paid or not. The main benefit of this type of facility is in cashflow planning, you will know exactly when you are going to be paid.
• International Factoring
  Some factors offer an international facility for the collection of overseas debtors. They make use of an associated factor based in the particular debtors country, they will be responsible for the collection of payment which they will remit back to the UK based factor.

Effectiveness of Factoring - Benefits to Your Business?

The most effective use of factoring is as a source of finance in time of expansion by releasing working capital tied-up in trade debtors. This provides cash in advance of the debtor payment. It can also ensure that debts are paid in a timely manner which also improves your cashflow.

The other major benefit is that it can release valuable management time in administering of the sales ledger allowing business owners to concentrate on the development and growth of their business.

Costs

There are two main costs in factoring briefly explained below:

Administration Charge - a factoring fee for the administration of the sales ledger this is expressed as a percentage of the invoice value. This varies depending on the workload to the factor but is typically between 0.5% and 1.5%.

Discount Charge - this is the cost of money advanced against the sales ledger and works like Interest in that it is charged as a percentage above Bank Base Rate and is normally no more expensive than an overdraft facility

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 The products and services promoted here are not part of the Offering and are offered in our own right. Limited accept no responsibility for this aspect of our business. These products are not regulated by the Financial Services Authority.