Debt Management: drowning in debt?

Cash flow problems and debt cause countless businesses to crash. The growth of factoring indicates it could provide a lifeline.
Sharon Smith

Unpaid debts and cash flow problems lead to one third of business failures. Less than half of UK invoices are paid on time. Eight out of 10 companies make more than 90% of their sales on credit terms. And the factoring and invoice discounting sector continues to grow at a healthy rate.

In 2000, the 35 members of the Factors and Discounters Association (FDA) lent £6.2bn, a 26% rise on 1999. Statistics from Bibby Group of Factors suggest that in the last four years the number of companies using factoring rose by 80%, while those using bank overdrafts fell by 40%.

True, the sector has a mere 28,000 clients out of an estimated 250,000 potential customers in the UK. But given that the client base continues to grow and that banks are diversifying into factoring, this type of financing warrants a closer look.

Sense of adventure

Factors and invoice discounters argue that they provide funds on a more adventurous basis than traditional lenders. Typically, they lend up to 85% against debtors as opposed to a bank's more cautious 50%. Asset-based lenders lend up to 50% against stock compared with a bank's 10% against finished stock, and will look at lending against land, buildings, plant and machinery. Not to be dismissed when you need that extra dollop of funds to expand or plug a gap.

Alison Small, business development director at Venture Finance, says that 'as a business you have to look at what factoring can provide for you: money to grow your business and credit control. Companies need customers and sales, but they need cash flow too, it's the life-blood of any business.'

The deal can also be quick. Key your details on to Bibby's website and it will come back with an immediate online decision as to whether it will accept you as a client.

Daring with debt

But how can factors afford to take so much more of a financial risk with clients? David Marsden, chairman of the FDA, explains: 'We are in day to day contact with our clients, viewing the turnover when it comes in and so on, which gives us a higher level of confidence than a traditional lender would have.'

Which inevitably means greater interference in a client's business affairs. The other drawback is that factoring does not suit every type of business. It is especially geared towards funding change and growth, with management buyouts and buy-ins the favourite fodder. It likes retail, manufacturing, wholesale and distribution for their cut and dried products, for which invoices can be speedily dispatched. Sectors with protracted and complicated contractual arrangements causing invoicing delays are not favoured. But where the nature of your business might cause a problem, geography will not.

'Our turnover for international factoring has grown by 20% in the past year,' says Dianne Blinkhorn, sales and marketing manager at Bibby. 'Due to increasing globalisation, this is a growing area in which UK-based clients use us to collect debts from overseas clients. We have multi-lingual teams to specifically deal with this.'

For those considering factoring, PricewaterhouseCoopers offers a free advisory service to bring together factor and client. Peter Buckle, partner at PwC, says 'match-making depends on a number of things, including the amount of money required and whether the client is looking for specifics. We tailor a number of asset-based lenders to a client and then it's up to the client to choose.'

Money up front

Founded in 1997 by Juliette Irvine, Bestecs is an IT recruitment specialist based in Stockport. The company needed extra capital to fund its growth and signed a factoring agreement with Venture Finance, which gives it 90% of invoice value up front. Bestecs pays under 2% above base rate for the loan and an annual charge of 1% of turnover.

Once the deal was signed, Bestecs expanded from a £950,000 turnover and three employees in 1997, to a turnover of £3.4m in 2000 and an eight-strong workforce. Commercial manager Steve Irvine says: 'We were growing quickly and we have to pay contractors up front, yet some of our clients would only allow us to invoice them monthly with another 30 days before payment, so a cash flow problem arose.'

They needed extra funds, and an accountant recommended factoring. Irvine comments: 'The advantage is that the money is paid up front and we don't have to run our credit control department. Nor do we have to go cap in hand to the bank. We have a non-recourse factoring deal, which means we're covered against bad debts. I'd recommend factoring, particularly in our line of business.'

Factoring: the facts

Factors and invoice discounters lend capital against a client's unpaid invoices. A factor takes over the client's sales ledger, an invoice discounter leaves responsibility for invoicing and chasing debt with the client. Asset-based financiers lend money against a client's total assets: invoices; stock; plant; machinery and land. Domestic factoring accounts for 16,198 clients and domestic invoice discounting for 8,726 clients, but more than two-thirds of the value of business is in invoice discounting.

Typical charges for factoring are an administration fee of 1% - 2.5% of turnover and interest on the loan of 2.5% - 3% above base rate. For invoice discounting, the administration fee would be up to 0.75% of turnover or a fixed fee. Interest on the loan would be 1.5% upwards over base rate.

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