Clues to finding a good factor

THE CONCEPT of factoring, or invoice discounting, by which an agent chases a company's debts in return for a percentage of them, is familiar to most business people. What they have less understanding of is the difference in services and charges between the 50 or so factoring companies currently operating in the UK.

This is why Cash Flow Solutions was set up 18 months ago. Having spent more than five years in the industry, the company's managing director, Tim Lea, felt there was a gap for an organisation that could help businesses by finding the best service at the best price.

In particular, he warns that companies should be aware that there may be more differences between the factoring and invoice discounting companies than there appear to be at first sight. 'Prudent selection of a factor can save you money, give increased funding and a credit management service which suits you,' he said.

Foremost among the things he believes should be taken into account when choosing a factor is financial strength. Membership of the Association of British Factors and Discounters is a good indication of this. But there are some good factors outside the organisation. As a result, it is wise to examine the factor's balance sheets and find out who its backers are.

It is also important to consider flexibility. Since business is likely to change over time, it is advisable to choose a factor that will get 'close' enough to react to developments - for better and worse.

A third significant issue is getting the funding required. Some companies go to a factor just for sales ledger collection and credit protection. But most mainly need increased working capital. And it is important that a business actually ensures that it receives the funding it requires. Mr Lea says one client achieved quotes of 33 per cent and 65 per cent funding from two different companies.

To help with this, companies should ensure they have a well-spread customer base. If 30 per cent or more of sales are to one customer, many factors would reduce the prepayments against invoices.

Finally, businesses must consider what happens if they want to end arrangements with a factor. Periods of notice required on termination do vary. Some only allow notice to be given on the anniversary of the agreement, while others give both sides three months' notice in writing.

Above all, Mr Lea adds, businesses must remember what they are paying for. In addition to comparing service and costs, they must consider the level to which they finance the factor's overheads. 'Have they unnecessarily large, expensive offices and cars, golf days and entertainment for big clients?'