The impact of concentration limits on a factoring facility

Concentration limits are often ignored until funding is restricted and at this stage it is often too late.

A concentration limit indicates how much of a debtor book a lender will allow with a single debtor. When I say allow I mean how much they will consider eligible for funding.

Let’s look at an example. Mr G Raffe Ltd set up a facility with one of our friends at a major high street bank. He is a new start company selling widgets which the high street bank are delighted about as it is a favoured sector for the factoring industry. They have offered him an 80% prepayment and Mr G Raffe is delighted. He noticed a 30% concentration limit in his agreement but didn’t want to ask what it was and as it was so well hidden in the agreement he decided to ignore it.

Not long after opening for business he receives and order for £100,00 including VAT from a large reputable supermarket chain. He is delighted. He delivers the widgets as agreed, gets a signed proof of delivery and raises and invoice. He places this on the banks system and looks forward to having £80,000 available the next day (80% x £100,000). It will be useful to pay wages and his supplier.

The next day he logs into the system. He can see the £100,000 that he has uploaded but the available balance is only £24,000. This can’t be right surely.

As the bank have a 30% concentration cap they will only consider 30% of this debt as eligible. As such they view the eligible ledger as £30,000 and then apply the 80% prepayment.

The effective prepayment is only 24%!!!!

Not all lenders impose a concentration limit and are happy to finance against a single debtor. Had Mr G Raffe set up a properly structured facility for his business he would have been able to access more than 3 times the amount of cash that the bank was offering him.

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Concentration limits are very important when considering a factoring facility. For some businesses they have no impact whatsoever on their funding but for some businesses it can be catostrophic.

It is important you consider how the structure of a facility can impact on your funding. This needs to be done when setting up the facility and before you sign up for a lengthy contract.

In the first instance why not contact Smart Factoring Quotes on 0845 863 0738

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Factoring Dispursements – the hidden costs.

When speaking to clients and reviewing their factoring and invoice discounting facilities I am often amazed at how much their dispursements are. What amazes me more is often they don’t actually know what what those dispursements are.

It is not rare to see clients whose dispursement charges are in excess of both the service fee and the discounting fee combined! This seems like madness to me.

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When investigating dispursement charges they often include re-factoring charges (although many companies show this seperately), same day transfers of money, overpayment charges and fees for credit checking new customers.

Many companies make the mistake of focussing purely on the headline rates of the service fee and the discounting fee. These can often be misleading.

The discounting fee is always quoted as a percentage over a base rate. Many lenders have a minimum base rate quoted in the agreement which can make this rate higher than it first appears. For example 2% over bank base rate when the bank base rate is 0.5% may appear as though it is 2.5%. Possibly, but if your invoice finance provider has a minimum base rate of 5% then the rate is actually 7%. Not all lenders have minimum base rates and in some instances the minimum base rate relates to the lenders own cost of funds but it is imperative you are aware of it, especially when trying to make comparisons.

In terms of the service fee you also have to be aware of the minimum service fee. If this is kicking in each and every month the % service fee is a red herring. Importantly though you need to understand what is included in the service fee. Some lenders quote a fee and everything is included while others quote a service fee and then have a large list of dispursements. The ‘all inclusive’ fee may appear slightly more expensive but in reallity it could be by far the better option.

When looking at invoice finance facilities it is not unusual for Smart Factoring Quotes to reduce overall costs by more than 50%.

If you have a facility why not let us review your facility and see what we can achieve for your business. There is nothing to lose.

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Dragon touches on basic house keeping and cash flow

Writing the first in a new series of guest blogs for the Institute of Credit Management (ICM), serial entrepreneur James Caan suggests that small businesses need to act to remove the barriers to payment and he urges smaller businesses to take more responsibility for their own actions in getting paid, and to consider alternative funding mechanisms in order to keep the cash flowing.
And James is quite right; not only are many SMEs under-capitalised, but many do not have what could be deemed as basic housekeeping mechanisms in place. Simple things such as obtaining a written purchase order, acknowledging that written purchase order and attaching some basic terms of business, all help to ensure the ability to enforce payment. A delivery note is also essential, as are clear payment terms on the invoice, backing up the payment terms originally agreed. The number of businesses that fail to do these tasks is quite surprising.
Now that the banking world has changed and, it is the opinion of many, is unlikely to return to the operational ways we all became used to in the past, the ways in which we generate working capital needs to be re-thought.
No longer is it a simple process to obtain an overdraft or term loan, and if there is little headroom being generated by way of profits, the likelihood of succeeding is low.
Looking to other means of cash generation is essential and that means considering asset based lending; principally invoice or receivables finance. One of the by-products of borrowing money in this way is that the simple mechanisms mentioned above form part of the package – invoice financiers like paper trails. It enforces a discipline and helps streamline a process. Often linked with credit insurance, the whole business becomes more secure and there is less likelihood of bad or un-collectable debts.
Invoice finance does, unfairly, sometimes get bad press. Often deemed expensive, many businesses continue to overlook the real value of enhancing their working capital in this way. Not only does it add a discipline to the way in which the business functions, it grows in line with sales turnover. Immediate cash upon delivery becomes the norm and a business can often grow far more quickly than if it had opted for a static overdraft. Used properly, the cost can be off-set by considering renegotiating payment terms with suppliers, gearing up to accept larger orders from customers, and therefore probably buying raw materials more cost effectively, in bulk. And what price does one place on growth?

In conclusion

The key for all businesses seeking funding though is in choosing an adviser who understands the finance market and which banks/lenders offer what products. At usually no cost to them, businesses can work with an independent adviser who will tap into the wide reaching network of financial providers, both in the equity and debt markets, and find the right funding solutions appropriate to their individual needs. They will also check the small print to help to avoid any tricky issues further down the line!
At Smart Factoring Quotes, we understand that choosing a finance partner is not a ‘one size fits all’ exercise. We match the most suitable products to each individual circumstance and we work together to ensure compatibility and satisfaction, adding value to your business or client relationship.

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A new facility for a security company with a single debtor

Smart Factoring Quotes are delighted to have assisted our newest client secure an invoice finance facility.

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We have put in place a factoring facility to help a Manchester based security company with a single debtor. Before approaching Smart Factoring Quotes the business had spoken with several lenders and had not managed to find a suitable solution.

From speaking with the client it took less than 2 weeks to provide them with the funding they desperately needed to fund expansion.

If you have a similar business or a client who is struggling to raise finance please contact us today.

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Smart New Website….

Smart Factoring Quotes are delighted to announce the launch of our new and improved site.

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Our aim has always being to be an online resource for business owners wanting to learn more about invoice finance. Our updated site is more informative and is easier to find information.

We want to empower business owners to make an informed decision.

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Timely payments from customers improves cashflow

This is clearly stating the obvious but how many customers do you have that pay on time? It is important to explain your payment terms to customers from the very start of the relationship.

If you are receiving late payments this can be detrimental to your business in the following ways:

  • It can cause cash flow problems
  • It can increase your finance costs
  • In turn this will reduce profits
  • It can take up the time of your staff chasing late paying customers

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It is not easy to get prompt payment from customers but through educating them and getting them in the habit of paying on time you can improve things.

An outsourced credit control service along with a factoring facility could be just what you are looking for.

The finance provided by the factoring company can help smooth cash flow while the credit control service will be applied methodically and professionally.

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Welcome to the Smart Factoring Quotes Blog

Smart Factoring QuotesWelcome to the Smart Factoring Quotes Blog. We aim to provide up to date topical information to business owners who are looking for an invoice finance facility.

The Smart Factoring Quotes website and in fact our whole company ethos is to help business owners make an informed decision when considering any type of invoice finance facility.

The blog is an extension on this and is designed to be both topical and interactive so please feel free to post comments and join in.

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Perception of Factoring

When dealing with clients we are often told that the facility “must be confidential” because they fear their customers response to them factoring.

I can accept that historically factoring was the finance of last resort but this is no longer the case. Banks today can no longer be secured over a debtor book by way of a simple debenture. This means that overdrafts have become a rarity unless secured elsewhere. As a result invoice finance has become the preferred route for growing businesses.

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If you have a business you can almost guarantee that your customers will have other suppliers who are using factoring and they will be well aware of it. It is certainly not a sign of financial problems.

While confidential facilities are available they may require you to “trade off” on other areas of the facility such as prepayment or pricing. It is therefore important to consider what is most important to you when looking for a facility and focus on those areas.

The key is to understand what your options are and to make an informed decision. If a confidential facility remains your main objective Smart Factoring Quotes are well placed to assist.

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What does the current low Bank of England base rate mean to invoice finance users?

Well you may think that everyone is benefiting from the current low rates. Unfortunately this is simply not the case.

If you have had a facility in place for some time it will be worth checking the small print and understanding if you have a minimum base rate in place. I know one lender who wrote to all clients advising that the minimum base rate was 5%. At the time the Bank of England base rate was 5% so nobody worried about it. However, I do wonder if they now realise that they are paying 4.5% over the Bank of England base rate plus the discounting margin added on by the lender. This is not isolated to an individual lender and is fairly common practice.

New clients may feel that they will benefit from the low base rates. Undoubtedly they will but again minimum base rates are prevalent in many agreements. A large independent has a minimum base rate of 3.5%. In fairness their own cost of funds will be higher than the Bank of England base rate so it is not all profit but it is important to be aware of what you are actually paying.

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Our advice is to review any facility you have had in place for some time. When looking at alternative quotes for a new facility be sure to understand all the costs. Headline rates can be misleading!

Remember to check the minimum base rate!

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Spot factoring and invoice discounting

Perry Burns of Working Capital Partners talk us through the market for spot factoring

A typical factoring or ID facility will be assessed on the creditworthiness of the supplier who will be expected to offer most, if not all, of his ledger to the Factor and to commit a minimum amount of annual revenue to them.  There may also be a fairly complex charging structure which can make the facility seem hard to understand and expensive.  To mitigate this, some factors will offer a debt collection service. This can be something of a mixed blessing because, by definition, they are less worried about the commercial relationship between the supplier and the customer; and may be rather more aggressive in collection than the supplier himself would be.

For these and other reasons, suppliers often regard factoring as a necessary evil and enjoy a love hate relationship with their Factor borne out of the frustration that the delay in collecting cash can cause.

Although it is very common in the USA and Canada, until very recently, Spot Factoring or
Single Invoice Factoring has not been very common in the UK.  This is for two main reasons.  Firstly the sums involved are typically too small to be economic for a large Factor to support.  Secondly, to make it work the Factor has to have a close working relationship with the supplier and really understand his industry and business processes.  For most financiers, the investment in creating the relationship is simply too high in terms of the likely reward.

Nevertheless the demand is there.  Small and newly established businesses have just as great a need for cash as larger enterprises.  Especially with bank lending still being very tight, they are finding it very hard to grow out of the recession as quickly as many of them would wish.

The funding options for smaller businesses tend to be very limited.  As they are new, they have very little track record, and even where they do they often want to do larger deals than they can finance.  Banks are typically unable to help and for the reasons stated above, factoring is usually not an option.  This means that they lose the opportunity to
grow and can become bitter and frustrated.

With the arrival of spot invoice discounting however, all this has changed.  With our Spot Factoring service, the facility is put in place and used on an as needed basis.  There is no minimum commitment and each transaction is judged purely on its own merits.  Thus a new start selling say, services to the NHS or a Local Authority would be eminently financeable, even if the transaction was only a few thousand pounds.  As long as we have
evidence of provable debt, the transaction can be financed, usually to 85% of
its face value.  And of course because this is Selective Single Invoice Discounting, once the customer has paid, the obligation to us is normalised and there is no unwinding fee or
future commitment.

The process is simple.  Once we are introduced to a new supplier we undertake a basic review to ensure that there are no obvious red flags.  Single invoice discounting is
offered as a recourse transaction, so we have to be sure that if the customer
fails, the supplier will be in a position to repay the advance.  Especially for younger businesses therefore, the directors will be required to guarantee the outstanding amount and a debenture on the company’s assets will usually be required.  We normally require that the business has more than one customer and we will only take up to 60% of their receivables.

Assuming that the client passes the preliminary checks, we will meet with them to put in
place a facility deed which sets out the terms and conditions of the arrangement and includes all the necessary guarantees.  At this stage a fee of £500 + VAT is payable
which covers set up of the arrangement and a free customer credit checking
service.

As soon as an invoice for factoring is identified, the supplier forwards the details to us by
phone or email together with proof of delivery and we aim to provide an indication within 24 hours.  For a new invoice, the supplier adds an endorsement to the invoice showing that payment is due to us or if the invoice has already been issued, writes to the customer
informing them that the debt has been sold and that settlement is now due to
us.  As soon as we have verified that the debt is genuine and that the customer intends to pay, we make a bank transfer the same day.

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Selective single invoice discounting:

  • is flexible
  • has no hidden charges
  • helps suppliers to pay key creditors on time
  • keeps customer relationships with the supplier
  • requires no minimum charges or ongoing commitment
  • gives the ability to offer extended credit terms to larger customers
  • provides immediate access to cash – the lifeblood of any growing business
  • offers the opportunity to take advantage of beneficial deals on materials or plant
  • is simply priced with straightforward  fees ranging from just 4%- 10% depending on the age of the debt

The service is NOT industry-sensitive. Funding can be provided for virtually any business selling a B2B product or service on
standard credit terms. The scheme has been devised especially with smaller business in mind to fund their growth. As their sales escalate so does the available funding.

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Beware of your facility limit

When looking for a factoring oir invoice discounting facility it is important that you look at your requirement and your growth plans.

Thne overall facility is the maximum amount that a lender will provide you without agreement to increase the facility. You facility may for instance be capped at £500,000 which when you commence may be sufficient.

However, if you use this additional working capital wisely your turnover can grow dramatically. This growth will mean you require more cash a potentially the £500,000 limit may be restrictive.

Most lenders will tell you that they will increase the limit as required but in some instances this does not prove true.

For example there are some lenders in the market who are unable to lend such large amounts. Some of the smaller independent providers may not be able to offer this amount simply because they don’t have it. Other independents are restricted by the banks that back them. A lot of independents who are funded by the banks can lend up to £500,000 based on their own lending criteria. However, above £500,000 they need to obtain bank approval and this is then judged on the banks own criteria.

If you have signed up for a 12 month agreement with 6 months notice and within 6 months you find ther limit is restrictive you may find that you are tied in and your growth will be restricted for the next 12 months.

If you have amitious growth plans make sure that your choice of factoring company does not restricts what you are trying to achieve.

In the first instance why not discuss your requirement with Smart Factoring Quotes on 0845 863 0738.

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Factoring for an air conditioning company

Our latest client is an air conditioning company that was looking for a cash flow solution.

They had approached their bank for an invoice finance facility but because some of their work was underpinned by contracts with main contractors the bank was unwilling to assist.

We helped them restructure their business in an orderly manner and we were able to provide a finance facility that helped them smooth cash flow.

The air conditioning company is now able to take on new contracts safe in the knowledge they can meet supplier payments and wage payments on time.

Our in depth knowledge of the invoice finance market allows us to help clients structure a facility that will work for their business and this is just one example of how we can assist.

If you are looking for an invoice finance facility contact Smart Factoring Quotes today.

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Finance for a new start recruitment company

We see a lot of enquiries for new start recruitment businesses where someone working in recruitment has decisded to start up on their own. These can range from a one person operations right through to well capitalised multi office operations.

New start recruitment businesses need to ensure a finance facility is in place so that they can pay contractors wages. This is imperative to ensure that the cash flow can support the weekly wage requirement. When considering a facility pricing is obviously a major consideration. The difference between the most expensive facility can be staggering. We believe it is important to consider total costs rather than just headline rates and our aim is to give you total transparency. Headline rates can in fact be very misleading with some lenders having a variety of additional charges.

Structure is possibly more important than pricing. If the facility is not structured properly then it will not generate the cash you require on a weekly and monthly basis. We take into consideration the unique characteristics of your recruitment business and structure a facility accordingly.

Additional services are also a major consideration for a new start recruitment company. Finance facilities can range from facilities that simply provide finance right through to full back office solutions that include invoicing, credit control and payroll. By outsourcing certain aspects of the administration it can free up more time to focus on sales but these services obviously come at a cost.

If you are looking for finance for a new start recruitment company why not contact us today on 0845 863 0738

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The benefits of using a factoring broker

If a factoring broker is ‘worth their salt’ they should offer you benefits over and above just randomly selecting some lenders from the yellow pages.

A good factoring broker will aim to understand your business and it’s requirement. Only when they have this understanding can they look to meet your needs by approaching the market.

They will also have an in depth understanding of invoice finance products and the invoice finance market of lenders. Different lenders have different product offerings, different pricing structures and also different underwriting criteria. By understanding both your business and the invoice finance market a good broker can help you find the most suitable type of facility for your business and the lender that is best placed to meet your needs.

In terms of costs a good broker should explain all the costs to you. It is very important to look beyond the headline rates which can be misleading. You should understand the total costs involved in operating your facility as only then can you make an informed decision.

Structure is equally important if not more so. If the facility is not structured to meet the unique requirements of your business then it may not do what it is set up to do. If the facility does not meet your needs it can cause frustration at best but can also cause more serious issues. A reputable broker who has understood your business and your requirement will ensure that the facility is structured to meet your needs.

I am a firm believer that only a business owner can decide what is best for their business. As such a good invoice finance broker should be aiming to explain what a clients options are. They should explain the benefits of each facility, the associated costs and also the responsibilities of the business owners or directors. Then a business can make an informed decision.

At Smart Factoring Quotes our aim is to support businesses in setting up facilities that genuinely work for them.

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Cash Flow Problems – what are the available solutions?

If your business has cash flow problems you may want to look for financial solutions. We can explore what these options are but you can also focus your internal operations to operate more efficiently.

In terms of operations you can look to reduce unecessary costs by finding alternative suppliers, making redundancies cutting back on non essential employee benefits, etc.. Many businesses that I speak with believe that they have already done this but it really does pay to be ruthless. Businesses can also look to extend the payment terms with suppliers either on a formal basis or simply by paying a little bit later. Most companies expect to be paid a little bit late and no doubt this is something that is causing your cash flow issues. This brings us on to collecting in invoices more effectively. By using professional and methodical collection techniques such as overdue letters and phone calls along with month end statements the debt turn should improve. Your customers need educating and these methods will help to get them in the habit of paying on time.

In terms of finance facilities available to help you smooth your cash flow or provide a cash injection you may look at the following:

An overdraft facility – these can be hard to come by as banks seem to have moved away from overdrafts for a number of reasons. However, if you can offer the right type of security an overdraft can be a cost effective cash flow solution.

Asset Refinance – asset refinance raises money against assets that you already own within your business. The types of assets are usually durable, saleable and easily identifiable. Suitable assets include vehicles, plant and machinery, printing presses, etc.. By raising money against existing assets you are releasing the ‘cash’ that is already tied up in your business and this can provide a valuable cash injection. However, you do create an additional monthly repayment. It is important to consider what you will do with the cash and wheter it raises sufficient income to meet the monthly repayments. If not you will only be compounding your cash flow problem.

Invoice Finance – Invoice finance can provide a cash injection as it provides cash against the outstanding invoices you have already issued. It can also smooth cash flow on a daily basis as invoices are raised. The most common types of invoice finance are factoring and invoice discounting. If you have a requirement for either why not contact us today. Invoice finance can release up to 90% of the cash tied up in your invoices and is a valuable source of working capital.

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Recruitment Finance

Smart Factoring QuotesRecruitment finance comes in various formats and with various added on services. Typically it is a requirement of temporary recruitment companies who have a weekly payroll yet only get paid by clients on a monthly basis if they are lucky. That said we have sourced numerous facilities for permamnent recruitment companies to allow them to access the cash tied up in their invoices.

Let’s have a look at some of the options available for recruitment finance:

Spot factoring – only this week we have been approached by a recruitment company looking to factor a single invoice for a placement they have made. This is where a factoring company will factor a single invoice for a fixed fee.

Invoice discounting – this is possibly the ‘lowest touch’ form of finance available when looking at invoice finance options. It can be confidential and simply provides cash against your invoices. There are no add on services other than credit protection should you wish to protect your recruitment company against bad debts.

Factoring – this provides cash in the same why invoice discounting does with the added service of outsourced credit control. This can also include credit protection should you want it.

Full back office solutions – this is ideal for recruitment companies who simply want to concentrate on recruitment. Aswell as finance this service will provide the following services: invoicing, payroll, credit control and credit protection.

If you are interested in what recruitment finance solutions are open to you please contact the Smart Factoring Quotes team today on 0845 863 0738

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Factoring fees. Are they increasing?

The headline rates for factoring fees seem to be reducing again as lenders return to the market and competition increases. This is obviously good news.

However, there does seem to be a lot of additional fees being introduced by lenders. Not necessarily fees that are new to the industry but we are seeing lenders introduce fees that were not previously charged. I have noticed some lenders introducing minimum base rates, refactoring fees, arrangement fees, legal documentation fees, etc..

Annual renewal fees are a fairly new introduction and are akin to overdraft fees as are arrangement fees. Some lenders ae even charging for the privelidge of using their internet system.

I think the message here is to be wary of headline rates. They can be misleading. It is important to consider total factoring costs when making a comparison.

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