Commentary: A worrying new factor

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Small businesses have had problems enough in this recession. A new spectre has arisen to trouble their nights. For the first time in living memory a factor, London & Provincial, has gone into administration with debts of pounds 4m, leaving behind a trail of extremely worried entrepreneurs.

Factoring and invoice discounting have always been held out as the way to ensure - at a price - that small companies get paid in full. An arrangement fee varying from 0.5 per cent to 2.5 per cent secures 80 per cent of debts outstanding. Financing costs around 3 per cent over base rate until the money is finally collected.

Customers of London & Provincial, many under-capitalised, may have to write off at least 20 per cent of their debts as bad. Some say they could go under. London & Provincial did not belong to the 11-strong Association of British Factors and Discounters, whose members are largely owned by the big banks and account for 95 per cent of the pounds 14bn factoring market. Sadly the moral must be to treat the remaining 5 per cent of the industry with circumspection.