In my experience, factors have been called all three. A factor provides a service that may or may not include the option to their client to draw early payment. What is done with that payment is the clients' responsibility. Monies drawn from a factor in advance of the debtor payments are really money due to trade creditors and should not be used for any other reason.
We have all heard that it was the factor's fault that a company became insolvent. Usually, on investigation it becomes apparent that the factor has not contributed to the demise of the company. The factor has been blamed to shift blame for the client's lack of administration, or failure to control quality of its service or product. These type of failures by the client result in their customer refusing to pay the factor until the goods are replaced, or service completed satisfactorily. The invoices representing the disputed sales are disputed by the factor, who then deducts those invoices out of the debts eligible for early payment, thus reducing funding to the client. The reason for the reduction of facility is the failure of the client to maintain quality of their product.
The other reason is that a prospect can choose the wrong factor. There are in excess of fifty factoring companies operating in the UK and selecting the right one for your needs is essential for the smooth running of your business. Smaller turnover prospects should look for a company with the same outlook as theirs. If you pick the wrong factor, relationships can become strained and in business you do not need to add to your burdens unnecessarily. You may feel if you are a small company using a larger factor, that you are being neglected and your needs are not being catered for. Therefore, a smaller factor would most probably be more suitable for your needs.
If you are a larger company, or a smaller fast growing client whose turnover includes exports in currency, with a smaller factor you may run into two problems - funding capping and currency problems. As factors practice what they preach regarding having a concentration in one customer, you might have outgrown your present factor. All these misunderstandings help to foster the factor's devil image. Some blame can be laid at the door of the factor, but often the prospect has selected the factor they are going to use purely on cost and not necessarily on their requirements. A professional broker can help determine the best factor for you, especially one that has worked in the industry. It is useful to be able to talk to existing clients - preferably in the same or similar trade - to see if you are going to be suited to a particular factor.
The real reasons for failure of business do not appear to have changed since time immemorial. Confirmation of this comes from 1896 when, in the Inspector-General's Annual Companies (winding-up) Report, it was estimated that 90 percent of company failures were "due to circumstances connected with their promotion, formation, or management". The reasons today, often stated by insolvency companies for company failures, are under capitalisation, or poor management. (Nothing changes, so it could be argued that one of these reasons could be extinguished - a case for a minimum cash capital for new companies? But that is another subject.)
Factoring has often been accused of being the financiers of last resort. This title is unjustified, as factors only provide a facility; the use of this facility is outside of their control. We must remember the factor buys debts, therefore the balance sheet worth of their clients is not a top priority and they will consider offering agreements to companies with weak balance sheets, as long as they can see that the client has a good product and the debts can be substantiated.
There are some industries, like temporary staff agencies and office cleaners who do not have or need substantial assets, that mean bank facilities are not available, whereas factors will purchase the agency's invoices because these are substantiated by time sheets or satisfaction notes signed by the customer. These type of companies consider factors as angels, as the factors provide funds that allow them to expand unfettered.
In fact, factoring is only a tool. Used wisely, it can benefit a company's expansion, but used unwisely will hasten the demise of a company. Nobody would consider using a plugged in, switched on, electric drill as a hammer to knock in a nail, or would they? Likewise monies received from factors for invoices factored should be used to pay trade & preferential creditors and not for capital purchases such as machinery, vehicles, etc.
Capital expenditure items should be funded by capital injected or profit retained in the business (in other words shareholders funds). If not funded by this means, the other option is leasing or rental, but before signing any such agreement, management should ensure that the company is generating sufficient profit to cover the expenditure.
My conclusion is that Factors are neither Devils nor Angels, but just a provider of a tool for businesses to use to their best advantage.
I trust this not too serious article makes some of you who had not thought of using factoring to help you business expand, will now consider using this very useful tool. I am willing to help you through the maze in choosing a factor. I can be contacted through any of the methods on our Contacts page or e-mail me now. All initial consultations are free to you, therefore you have nothing to lose by talking.
©Malcolm E Gilbey MICM August 1998
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