There are many Factoring myths surrounding this modern day funding solution for businesses.
These have been borne over the years and have been passed down from generation to generation.
Many Factoring myths have been circulating over the yeas has led to this type of lending becoming stigmatised.
Factoring should be seen as a positive type of lending facility which many a business can benefit from.
Five Common Myths
1) Factoring is only for failing businesses?
It is well known that historically Factoring was seen to be a facility used primarily when a business was failing. The banks use to step in and put the business onto a factoring facility. The reason for this is that the bank would then have more control over the business and in turn have the ability to recoup any outstanding funding owed to them.
In essence Factoring was often implemented too late and the business failed. It is for this reason that most people associated the failure to the Factoring facility.
In most cases it was not the Factoring facility that made the business fail it was what happened previously.
2) Factoring can be expensive
One of the most common Factoring Myths is that Factoring can be expensive.
In order for something to be expensive then there has to be something to compare it against. Factoring is seen to be expensive as it is often compared against other lending products such as loans or overdrafts which are cheaper in comparison. The key fact which is often overlooked is that Factoring includes a credit control service which other lending products do not provide. It is this additional service which makes up the additional cost.
If you break down a Factoring facility it has two key elements. The first being the borrowing charge and the second being the Factoring service which we know as Credit Control.
Element 1 – The Borrowing Charge
In our experience the borrowing charge for a Factoring facility is never any more than 6% per annum. The average charge currently seen on the market is circa 3% per annum. If we compare this against business loan rates as of Jan-18 Santander – 4.9% – 24.9% Barclays – 9.9% APR (up to £25k) Lloyds 9% APR (Up to £25k) HSBC – 7.4% APR (up to £25k) **Rates differ for lending over £25k and are subject to credit rating of the business.
The reason why Factoring borrowing charges are most often cheaper in comparison is because the lending is being secured against an asset (The Invoices). There could be some argument that loan or overdraft rates are cheaper for borrowings over £25k but the reality is that there probably would not be that much of a difference to make the assumption that Factoring is expensive. This is purely a perception.
Element 2 – Credit Control
As part of the Factoring service a credit control solution is provided. Each lender will appoint their own credit controller to the account and will effectively undertake the credit control on the businesses behalf.
The Factoring charge for a credit control service is approximately 1% of the invoice value. This therefore represents an approximate fee of £10k per £1mil of invoices raised.
A review of https://www.reed.co.uk/ as of Jan18 shows that the average salary for a full time credit controller is £20k per annum. It could be seen that Factoring can be expensive should a business turnover c£2million or more.
In reality if a business is turning over £2million or more then they should have the internal controls necessary to undertake the credit control duties themselves and therefore an Invoice Discounting facility should be considered. See below**
On the other hand if a business that has a turnover of £8mil and use a Factoring service they may incur an estimated factoring cost of £80k (£8mil x 1%) however this size of business could require 5 or more credit controllers which will command a fee of £100k (5 x £20k), therefore rendering Factoring a cheaper alternative.
The reality is that every business is different but the current ABFA statistics show that the majority of factoring users turn over less than £2mil per annum and therefore factoring should be deemed a cheaper alternative than using a full time credit control function.
**Invoice Discounting is a Finance product without the need for a credit control function.
3) All debtors will be harassed?
This is technically not a Factoring myth as some lenders will be more aggressive with their credit control strategy than others.
Over at All Star Funding Solutions we only work with lenders that agree a credit control strategy with you. This allows you to be in full control.
In reality most lenders will use a low touch credit control service which includes letters and when seriously overdue a telephone call when necessary.
4) All Invoices have to be notified.
In addition to the other myths this is one of the main Factoring Myths. In today’s climate there are many lenders who can provide a Factoring facility on a pick and choose basis. A business can now select which invoices they would like sell to the lender for funding.
5) Once using Factoring you can’t get out of the facility.
This is one of the most interesting Factoring Myths. Factoring should not be seen as any different to either a loan or overdraft.
If you sign up to the correct agreement which All Star Funding solutions can advise upon then it should be relatively easy to get out of as long as the funding is repaid.
Factoring often allows a business to borrow far more than what a current overdraft or loan is able to do and therefore in this respect would take far longer to repay. This is the key reason why it is seen that Factoring is the type of facility where businesses “can’t get out of”. In reality Factoring is only a loan against the book debts and like any loan can be repaid at any time.
If we were to survey the 17,000 users of Factoring facilities across the UK then most would say that the Factoring facility is integral to their business activity and therefore would not want to lose it. This again leads to businesses using Factoring for longer periods of time which again to some look like they are not able to get out of the facility.
If a business is currently using Factoring and feels as though they “can’t get out of it” All Star Funding Solutions can offer help and advice on the specific situation.
Lastly click below to apply for a Invoice Finance quotation
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All Star Funding Solutions Limited
2 Mount Street,
Office Tel 0161 8211478 Mobile 07771 430 740
Please find below our specialist areas:
- Asset Based Lending
- Asset Finance
- Business Loans
- Cashflow Finance
- Invoice Discounting
- Single Invoice Finance
- Trade Finance
- Stock Finance
- Credit Insurance
We operate throughout the UK but have built strong relationships in the following areas Manchester, Liverpool, Preston, Chester, Warrington, St Helens, Wigan, Bolton, Bury, Oldham , http://www.mapmoose.com/northwest.html