Business finance survey – Accepting the factors

Factoring and invoice discounting are now running neck and neck with the more traditional bank overdraft and term loan as the type of business finance most recommended by accountants, a national survey has revealed.

The survey, carried out by Accountancy Age, in conjunction with the Bibby Group of Factors, also revealed accountants are more likely to see factoring as appropriate for a company’s growth rather than as a last financial resort in times of trouble.

‘This survey finally lays to rest the misguided view that factoring is the last chance saloon for a shaky business,’ says David Robertson, chief executive of the Bibby Group of Factors. ‘There seems little doubt that, at least where accountants are concerned, factoring is now widely recognised as offering a crucial financial tool for growing businesses rather than the reverse.’

David Marsden, chairman of the Factors and Discounters Association, adds: ‘The wider understanding by professional advisers of the very real benefits our members provide to growing businesses is a key element supporting the continuing growth of factoring and invoice discounting. The fact that, in a fairly flat economy, the sales turnover handled for members’ clients increased by 14% in the first quarter of 1999, compared to the same period in 1998, demonstrates the ability of our industry to continue supporting the working capital requirements of expanding small to medium-size enterprises, which represent the traditional field for factoring and invoice discounting.’

Two-thirds of accountants – compared to one-third in an Accountancy Age survey carried out four years ago – now consider that factors explain and promote their service more effectively.

Some respondents did voice doubts, however, over the cost to companies of factoring and invoice discounting, and also over a continuing image problem. ‘The business community still views factoring as a sign of instability,’ as one respondent put it.

The business finance survey, carried out over April and May, attracted a total of 207 replies with around three-quarters in practice and the rest in business.

The major revelation came over accountants’ views on the comparative merits of five different types of business finance on the basis of cost effectiveness.

The respondents were asked to rank: factoring and invoice discounting; private investors; bank overdrafts; venture capital; and bank term loans on a rising scale. The bank overdraft and bank term loan were indistinguishable as the accountants’ preferred form of finance, each attracting just under 22% of first place ratings.

Factoring and invoice discounting came a close third with just over 21% of accountants rating it as their preferred financing method. Private investors and venture capital each came a little behind with under 18% of votes.

Interestingly, the previous survey in Accountancy Age had private investors as the most cost-effective finance source with the bank overdraft close behind, followed by venture capital, factoring and invoice discounting, and, finally, the bank term loan.

The recent results not only signal a major change, with banks and factors now clearly providing accountants’ preferred forms of business finance, but also with little to choose between them.

‘The figures speak for themselves,’ says Robertson. ‘Many small businesses in the recession of the late 80s and early 90s lost their equilibrium when the banks pulled the rug from under their feet and some still bear the scars. This would explain the gradual replacement of bank finance by factoring and invoice discounting as the preferred business finance of the SME. This time round, factoring was just pipped at the post by bank finance, but within the next four years we expect factoring to gain even more ground until it replaces bank finance as the number one with SMEs for cost-effectiveness.’

The most recent Bank of England figures show that banks currently provide 47% of SMEs’ finance compared to just 6% from factors.

Since the end of 1992, however, lending on bank overdrafts to small businesses has fallen from £19bn to £11.2bn, a decrease of more than 40%. Although some of this lending has been replaced by fixed-term loans, there is still a shortfall of £3.5bn.

Factors, on the other hand, provided £4.1bn of working capital to SMEs in 1998, an increase of £2.5bn since the end of 1992 and of 13% over 1997. The industry now takes care of turnover worth more than £50bn in total, representing some 5% of the UK’s gross domestic product.

For Bibby, turnover has grown in the four years from 1995 to 1998 from £317m to £712m, an increase of 125%. The take-on of new business clients has also shown growth exceeding 600 in 1998.

With regard to the competitive industry issue of independent factors as against bank-owned factors, the survey respondents who were in practice had no doubt that they would recommend an independent factor over a bank-owned one both for undercapitalised SMEs (74% respondents as against 8%) and for businesses with turnover less than £1m (68% vs 16%). On the other hand, accountants are equally divided as to whether they would recommend a bank-owned or independent factor to a company with a strong trading performance and balance sheet (38% respondents for banks as against 40%). This would suggest that SMEs are spreading their risk by opting for organisations with a more autonomous structure.

Another revelation is that well over a third would recommend factoring for a company’s expansion. A further 25% see it as most appropriate for credit control. In contrast, a mere 20% of respondents saw factoring as best suited to recovery or turnaround situations.

Just over half admitted that either they or their clients had reservations about factoring as a source of business finance. Of these, 34% cited ‘cost’ as the problem, while 29% cited the business community’s perception of factoring. A typical quote in answer to the question: What reservations do you have about factoring? was: ‘None – but clients continue to have reservations over cost and status.’

Another accountant volunteered: ‘General opinion is that factoring is more expensive than bank finance,’ while another wrote: ‘Use of factoring does imply financial problems to the uninitiated.’

Certain sectors were also considered by accountants to be inappropriate for factoring. Of the respondents, 46% cited the building industry, with 13% opting for retailing and service industries respectively, and a further 12% contracting.

Where the respondents’ basic knowledge of factoring and invoice discounting was concerned, the new survey compared favourably with its predecessor, 46% admitted ‘considerable’ knowledge, 53% ‘some’ and just 1% ‘little or no’ knowledge. This compares to 17%, 61% and a staggering 22% respectively in 1995.

Understanding the difference between factoring and invoice discounting has also improved over the four years separating the two surveys, with 96% now affirmative compared with 77% in 1995.

Where the respondents of the two surveys were in agreement was over whether factoring was only appropriate to companies in the early stage of growth with 90% in the new survey and 89% four years ago giving a resounding ‘No’. Equally, 88% and 86% respectively disagreed that a company must be in trouble if it used factoring or invoice discounting, while a fraction more (92%) in the new survey disagreed that they were only appropriate to companies unable to control their sales ledger.


Moulding production company Rototek has increased its turnover more than fourfold in just three years – with a little help from factoring.

The Newark-based firm decided to factor rather than approach a bank to finance ambitious expansion plans because it is completely owned by its own directors. ‘We didn’t want to rely on our assets or put up personal guarantees,’ explains managing director Martin Spencer. ‘Factoring offered us a greater degree of flexibility and more borrowing is always available without having to rearrange it.’ Today the company’s turnover is £1.1m and next year it aims to achieve £1.5 m. ‘Our long-term objective is to continue to grow by offering customers new moulding technology and better service and factoring seems the logical way to finance this,’ says Spencer. ‘We would only consider pulling out of factoring if we stopped growing.’

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