Make way for the krypton factors

Over the years the factoring and discounting industry has acquired a reputation as the second-hand car salesmen of the financial world. According to the myth, these are the shady boys of the money system who may have their uses, but you don’t exactly shout about choosing to use their products.

Unsurprisingly, the factoring industry rejects the accusation. Although acutely aware of the image, it insists the picture painted is as relevant today as pound notes and slide rules. One indication of how keen they are to present an image of dullness and respectability is that the keynote speaker at the trade body’s annual conference this June is a certain John Major. You don’t come much less racy than that.

The accusation that lingers is that using the services of an invoice discounter is a last resort. As one accountant in a major insolvency practice remarked: ‘Your high street bank turns down a request for a loan or an overdraft, so the business decides to factor the sales ledger.’ The next step, says popular legend, is to place the business in the hands of an insolvency practitioner.

This image is just a misunderstanding of the different services offered, according to Chilton Taylor, a partner with Baker Tilly. He says: ‘You have to distinguish between factoring and invoice discounting.

‘Invoice discounting has many of the benefits of factoring but is more discreet. Its image has improved dramatically over the last five years.

It is now a cost-effective alternative to bank finance, and provides a flexible finance facility particularly appropriate for expanding companies.’

In many ways, it does seem strange that the dodgy reputation has persisted for so long, especially when most of the major players are subsidiaries of banks or other major financial institutions – obviously the last word in respectability and trustworthiness.

But even the industry’s trade body, the Factors & Discounters Association, knows there is more to do. Asked to sum up the current perception of his industry, the FDA’s David Richardson says: ‘It is neutral but improving.’ In particular, the FDA agrees with Taylor’s assessment that there is still widespread confusion – even among financially literate professionals – about the difference between factoring and invoice discounting.

‘Despite the speed with which the industry is growing, it could be growing even faster if we could educate business,’ says Richardson. ‘We’ve still got plenty of work to do.’

According to Richardson, the industry is trying to undo the harm done three decades ago when it was first imported from the US. In the UK, the idea of factoring debts was first used by the rag trade in London during the swinging sixties.

The concept seemed simple: buy a company’s debt and then collect it. Unfortunately, some of the first clients might have been hot-shot clothes designers and manufacturers, but they weren’t too financially sound. ‘We’ve come a long way since those early days,’ says Richardson, ‘but it has been a long, hard road to repair the damage from that time.’

The bad reputation didn’t end when the Beatles broke up. Danielle Stewart, partner in fast-growing London-based firm Warrener Stewart, says: ‘There was a time in the mid-eighties when you wouldn’t recommend factoring because everyone assumed you were going bust. The factoring industry has changed that perception. If you have reliable clients – such as the government, who will pay but always take a long time – factoring is a brilliant, but still limited, tool.’

Limited or not, factors and invoice discounters over the years have become more choosy about the clients they take on. The financial history and future prospects of prospective clients are rigorously checked out. Richardson says: ‘If you go into the wrong situation with the wrong company, you’re just deferring the evil day. And there’s a good chance we will lose money.’ Compared with 30 years ago, factors and discounters are now more skilled at judging the quality of the customer’s sales ledger and credit notes, and its sales-ledger administration skills.

As the industry has become more skilled, it has grown dramatically. Current figures suggest that not everybody is put off by the image: some 24,000 companies now use the sector’s services, with turnover rising by 12% in 1998 to #56.7bn.

As well as flaunting its size, the industry is also keen to promote this form of asset-based finance as flexible and innovative.

The FDA particularly likes to emphasise how invoice discounting can help seal corporate finance deals, especially management buyouts and buy-ins.

When the management of Stevenage-based Arista Tubes – which manufactures plastic tubes for the cosmetics and personal-care markets – bought their business from Courtaulds Packaging Europe, part of the working capital financing came from Lloyds TSB Commercial Finance, which provided a ‘revolving debtor facility’ – a posh way of saying ‘invoice discounting’.

Arista’s managing director, Jeremy Paul, says: ‘Asset-based finance from LTSBCF has allowed us to preserve equity for the management, and is also flexible enough to accommodate our plans for the future.’

Buy-outs are one area where it seems there are winners all round: the management and the venture capitalists don’t need to spend precious equity capital as working capital, and because they know the invoice discounters see them as a safe bet they can even negotiate a good price. As for the invoice discounters, they win a well-established new client promising minimum risk, and they are associated with an area of business – corporate finance deal making – perceived as dynamic and exciting.

Recently, invoice discounting has grown faster than factoring. But perhaps factoring should not be written off quite yet. This is an age when outsourcing is all the rage, with major IT and professional services firms trying to persuade global companies to outsource practically anything that moves. It seems ironic that factoring should still be regarded with suspicion. After all, factoring is merely outsourcing the sales ledger.

As Richardson puts it: ‘There are those people who worry about someone else running their sales ledger. They say they worry about whether people will continue to buy from them. But if you have the right product at the right price, it doesn’t really matter how the invoice is handled.’

For growing companies, with better things to worry about than credit control and cash flow, factoring can provide a more professional sales ledger operation – clearer statements, correct posting and less chance of disputes – than they could afford on their own. And when they have grown enough to bring the sales ledger back in-house, they can graduate to invoice discounting to keep the cashflow ticking through.

Baker Tilly’s Taylor says: ‘Factoring is more overt – you are selling the debt. If the company has good internal controls there is no reason why these should use the more expensive option of factoring.’

Image may still be a problem for the factoring and discounting industry.

But with the right backing from banks and accountants, it seems certain that the industry will have much less trouble appealing to a younger generation of business owners and managers with no memory of the bad vibes from the past. Peter Williams is a freelance journalist and a chartered accountant


What is factoring?

(sometimes known as Full Service Factoring)

The Factor agrees to:

Pay an agreed percentage of approved debts as soon as receiving copies. The percentage depends upon several issues, but 80% to 85% is common.

The balance, less charges, is paid when customers pay. This finance keeps pace with business growth, without parting with control or equity.

Undertake all credit management and collections work, following an agreed credit policy to ensure faster customer payments without loss of goodwill.

In addition, factors offer the option of including protection against bad debt losses in their service.


The charge for credit management is usually between 0.75% and 2.5% of turnover. For the finance provided in advance of collections, there is a discount charge calculated on day-to-day fund usage. It is likely to be comparable with normal secured bank overdraft rates.

Invoice discounting

Invoice discounting can turn debtors into cash faster. Immediate cash is available, up to 80% to 85% of approved invoices.

However, responsibility for the sales-ledger operation remains with you, and the service is normally undisclosed to customers.

Payments that you receive are paid into a bank account administered by the invoice discounter, after which you are credited with the balance, less charges.

In addition, some invoice discounters include bad-debt protection in the service.


The administration charge is either a flat monthly fee or a percentage of turnover.

For finance provided in advance of collections, there is a discount charge calculated on day-to-day fund usage. It is likely to be comparable with normal secured bank overdraft rates.

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