Factoring for my company

Startup_Paul

Has anyone got experience in using factoring ? I am looking at this as an option for possible cashflow issues in the future.

Bibby is one of the companies I am going to approach.

Thanks

Paul

Gloomtastic!

I'd avoid like the plague. Initially you will gain from having available cashflow but eventually all the special T&C's will eat into your reserves until you end up owing the factoring company money. Companies that are on their last legs usually resort to factoring but it really is the beginning of the end.

If you are a new company then set in place a rigid credit policy for your company that you never break.

1. Credit check all companies that you intend to do business with. You wouldn't hand a stranger on the street €1000, why would you do it in business?
2. Get credit references from other suppliers that your customers deal with.
3. Make your credit terms obvious in writing before any contracts are signed.
4. If a company does not pay within those terms then find out why not and action immediately.
5. Chase all invoices a week after you've sent them and check that a) the company has received it, b) that it is with the correct department to make payment and if not, follow it round the company until it ends up with the person who makes the payment and c) get the date when they expect a payment to be made.

Keep notes of all calls. Diary in payment dates and if they are not received on that date, contact and find out why not?

Credit control really is life or death for businesses, don't let it slip!

Peterdalkey

Gloomtastic is right about Factoring. Old fashioned factoring has largely been replaced by Undisclosed Invoice Discounting. BoI and Ulster Bank are very active in this market. Interest rates are significantly lower than overdraft rates, even allowing for the very negotiable fees.
They may not be that keen on a startup, but you should talk to them. Google all the providers in Ireland.

Startup_Paul

Hi

Thanks for the level of input information you have supplied here. All of your points are part of how we would approach payment of invoices. The issue is that as a start up company in a business to business market, we most likely will have to extend credit terms. Ireland, unfortunately is terrible in terms of protracted defaulters whereby the average payment of invoices can be anywhere between 60 - 90 days and beyond. Many of our suppliers who are our lifeline, are international where the culture is different, in other words, when you extend credit terms of say 28 days, you honour this. We rely on the confidence and trust with these suppliers so we have to pay, this I believe will be extremely difficult if a large percentage of your clients wont pay on time and leaves us very vulnerable as a start up, hence the need for some level of protection in this vital area. Our research really tells us that we don like factoring or invoice discounting but what other options are there to protect our cash flow at this very stage in our business cycle, our business model is very good and once trading within time we will be able to stand on our own feet but there is this blockage at the beginning - it is very frustrating - loans and investment are other options but are not ideal to what is technically a cash flow issue

Would love any further input - thanks

Peterdalkey

the annual rate of interest is less than AA overdraft and the debt is not individually sold to the financial provider. They take a charge on the debtors ledger. Additionally, the facility is not transparent to the debtor either. You are confusing it with Factoring, it is not the same facility/product.

The post to which this reply refers has been removed

Gloomtastic!

Yes that was me Peter. The OP's response made my response irrelevant.

Startup_Paul wrote: »

Hi

Thanks for the level of input information you have supplied here. All of your points are part of how we would approach payment of invoices. The issue is that as a start up company in a business to business market, we most likely will have to extend credit terms. Ireland, unfortunately is terrible in terms of protracted defaulters whereby the average payment of invoices can be anywhere between 60 - 90 days and beyond. Many of our suppliers who are our lifeline, are international where the culture is different, in other words, when you extend credit terms of say 28 days, you honour this. We rely on the confidence and trust with these suppliers so we have to pay, this I believe will be extremely difficult if a large percentage of your clients wont pay on time and leaves us very vulnerable as a start up, hence the need for some level of protection in this vital area. Our research really tells us that we don like factoring or invoice discounting but what other options are there to protect our cash flow at this very stage in our business cycle, our business model is very good and once trading within time we will be able to stand on our own feet but there is this blockage at the beginning - it is very frustrating - loans and investment are other options but are not ideal to what is technically a cash flow issue

Would love any further input - thanks

Why do you need to extend credit terms? If they want to do business with you and you supply everything they require, when they require it, then why are you expected to wait for payment beyond your credit terms?

Why should Irish customers be allowed to treat their suppliers differently than our European counterparts? Probably because Irish businesses are not run as professionally as our neighbours.

I run a small business in a pretty crowded marketplace. I occasionally deal with some of the largest companies in Ireland, home grown and international, and my credit terms are payment on invoice. This is agreed with the client before the order is confirmed and 95% of the time it is adhered to. The remaining 5% will pay within 7 working days.

Be professional in everything you do in business, and make sure everyone in your company does the same. Don't run your company like Irish people do, run it like the Germans!

Peterdalkey

Not an issue at all P

Startup_Paul

Hi,

Sorry, when I used the term extend credit terms, I meant, give the normal credit terms to the client (30days) not extend beyond those terms

It is really good to hear that your clients are working within the terms of credit and that gives us some hope. I have been working on the international markets for over 15 years and in this area everything works well, however on setting up this business and speaking to a lot of other company's, there appears to be a serious issue with Irish companies when it comes to paying invoices within credit terms (known as protracted defaulters). This would be a serious issue with regard to the business model we have as the services we are providing to Irish clients are from international suppliers, hence the issue of paying the suppliers on time but not getting the payment from the Irish clients which as mentioned previously can be up to 90 days.

We are putting in every effort to carefully process, monitor, follow up and track payment of invoices but even with this, it appears that the situation in Ireland is not good and that there is a domino effect to a lot of businesses (especially small / SME) that are negatively effected by this. There also appears to be a culture around this and even though there is seemingly legislation in the Dail that is currently looking at this, it could take years for the culture, damage and mindset to change to reflect a proper system that is undertaking by our friends in Europe

Even, I believe the situation is a lot better in the North, where legislation and culture works around payment of invoices on time. We have heard of companies in the North who have seized or greatly reduced the level of trading with companies in the South because of this issue

Hence, in trying to get our business of the ground and it is a good business, we have had to carefully look at this which leads to what is the solution and is it factoring / invoice discounting as a short term solution until we can stand on our own feet and offset any future protracted defaulters

Hope this makes sense and maybe I have missed something here, would be great to get further input on this subject as it is one of the main thorns in our side

Thanks

Gloomtastic!

Forget legislation, it won't make a difference. The UK's had it for years and it hasn't changed anything.

Gloomtastic!

Are companies going to do business with you because you are the best or because you can offer them the longest free overdraft? If it's the latter then you're on a very slippery slope.

Startup_Paul

Thanks Peter.. So are you saying it would be a viable option if you got the right Interest rates etc ?

terryhobdell

I would have no special fear of invoice discounting have used it for years after initial fears some 20 years ago. Have found it the perfect solution. Make sure you keep your credit control efficient get the best interest rate and other terms you can from discounter. They will audit you to ensure you are following their terms. If you are it is fine. You have access to the largest credit line available.

Peterdalkey

Startup_Paul wrote: »

Thanks Peter.. So are you saying it would be a viable option if you got the right Interest rates etc ?

As Terryhobdell says it is a very useful way to access singnificant cash facilities. As a strartup, you may find it more difficult to secure without a track record, but there is only one way to find out!

Startup_Paul

Thanks to you both... Just one other thing... you are mentioning Invoice discounting, we have looked into this and they will require a trading history and you control your invoicing etc.
We are looking at Factoring.. The downside we see with Factoring is that the factoring company take control of your invoicing etc... so contact the customers for payments (coming up to 30 days and after).. So we are a little wary of using them for this reason. They could upset the customers. But there is the financial benefit of giving you around 80% of your sales invoice upfront and then the rest minus there fee when the customer pays.
Anyone have experience working with factoring companies.. ?

Thanks.

Gloomtastic!

Startup_Paul wrote: »

Thanks to you both... Just one other thing... you are mentioning Invoice discounting, we have looked into this and they will require a trading history and you control your invoicing etc.
We are looking at Factoring.. The downside we see with Factoring is that the factoring company take control of your invoicing etc... so contact the customers for payments (coming up to 30 days and after).. So we are a little wary of using them for this reason. They could upset the customers. But there is the financial benefit of giving you around 80% of your sales invoice upfront and then the rest minus there fee when the customer pays.
Anyone have experience working with factoring companies.. ?

Thanks.

They give you 80% upfront in the first month, in the second month they give you 80% of your invoices minus 50% of the previous months invoices that haven't paid and so on. Which, because you are letting them, will be the majority of your customers. It's all in the fine print and it will eventually kill your company.

If you have no available financing then you have to go with a very strict credit policy. There is no other way!

Peterdalkey

Found this useful little piece http://www.realbusinessrescue.co.uk/articles/business-finance-funding/cash-flow-worse-off

Paddyo

We used Invoice Discounting in a company I worked for and my feeling is that this was one of the main reasons the company has gone into liquidation.

The finance company did nothing wrong - I think our company got into a rut and in the end had no way of ever getting out of it. Sales were going down and 70% of any money that came in went directly to the finance company.

It also made our company put more of an emphasis on Invoicing rather than collecting money. I know that without invoicing there is no business, but as I was thought years ago, a sale is not a sale until it has been paid.

My advice would be, if you have to use it do, but only for short-term cashflow issues and have a plan to exit from the process.

Paddyo

Peterdalkey

Paddyo wrote: »

We used Invoice Discounting in a company I worked for and my feeling is that this was one of the main reasons the company has gone into liquidation.

The finance company did nothing wrong - I think our company got into a rut and in the end had no way of ever getting out of it. Sales were going down and 70% of any money that came in went directly to the finance company.

It also made our company put more of an emphasis on Invoicing rather than collecting money. I know that without invoicing there is no business, but as I was thought years ago, a sale is not a sale until it has been paid.

My advice would be, if you have to use it do, but only for short-term cashflow issues and have a plan to exit from the process.

Paddyo

Irrespective of whether using factoring/invoice discounting or extending normal credit, if you do not collect the cash, you will run out of money!! With Factoring and invoice discounting AND falling sales, the result is a falling amount of cash available to pay bills as you have already drawn most of it down in advance. This can lead to a cashflow meltdown very quicklly indeed. By the time it becomes a problem, it is normally too late.

Conversely, if a business is growing sales rather quickly , it frees up cash for purchases to service new business.

Startup_Paul

Paddyo wrote: »

We used Invoice Discounting in a company I worked for and my feeling is that this was one of the main reasons the company has gone into liquidation.

The finance company did nothing wrong - I think our company got into a rut and in the end had no way of ever getting out of it. Sales were going down and 70% of any money that came in went directly to the finance company.

It also made our company put more of an emphasis on Invoicing rather than collecting money. I know that without invoicing there is no business, but as I was thought years ago, a sale is not a sale until it has been paid.

My advice would be, if you have to use it do, but only for short-term cashflow issues and have a plan to exit from the process.

Paddyo

Thanks for your insight and advice Paddyo...

Startup_Paul

Peterdalkey wrote: »

Irrespective of whether using factoring/invoice discounting or extending normal credit, if you do not collect the cash, you will run out of money!! With Factoring and invoice discounting AND falling sales, the result is a falling amount of cash available to pay bills as you have already drawn most of it down in advance. This can lead to a cashflow meltdown very quickly indeed. By the time it becomes a problem, it is normally too late.

Conversely, if a business is growing sales rather quickly , it frees up cash for purchases to service new business.

Hi Peter.. Yeah your last point is sort of what I was looking for... I understand fully now all the pitfalls or dangers with Factoring/invoice Discounting.. but if you have steady sales it can free up cash to... Thanks a lot Peter