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Ian I know from other forums that you give really good advice and I don’t doubt your integrity for a minute but I have simply never had a happy experience with factoring with any of my clients. I can only talk from experience. Normally the main issue I am addressing is how to get them out of the contract and back to making money rather than chasing growth.
Again don’t know what your fees are but the client who’s books I am currently completing was charged 4.8% of turnover from a high street bank. T/o was only £150k so although I think the “headline” rate quoted was 3.5% but it racks up with all the fixed charges. Now finally making good money in the last 3 months when he is back in control of his finances. To do this we had to shrink the business by 40% to within his working capital means and dramatically improve his cash collection procedures.
In terms of the maths, if you have your 15% margin per your example, 5% factor costs is 1/3rd of your profits! If you have a £240,000 t/o business with a 60day cash cycle (ie £40k cash requirements) making £36k PA, to double the t/o with a factor charging 5% you would make £48,000. This doesn’t sound much extra to me personally given the effort to double sales. Moreover when you analyse it you are paying £24,000 in one year just to finance an extra £40,000 in working capital (we previously had £40,000 available at £240k t/o)……………probably better served with a combination of a bank overdraft and tighter cash flow management, E.g. proper credit control, reducing terms, offering discounts for early payment etc. All doable things and good business.
Yes factors can be very useful people to know, especially when banks wont lend and a company is looking at an abyss, but to finance growth? Many things to do before you get to factoring I am afraid. It also spooks customers as they think you are about to go bust when they find themselves paying the factor.
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