Factoring houses are keen to claim their services – the advance of usually up to 80% to 85% on clients’ invoices on receipts – are particularly suited to small to medium-sized companies faced with the daunting prospect of expanding abroad. Export sales now represent a quarter of UK GDP sales, but factors and invoice discounters still only finance five per cent or #3.2bn of the international market.
And last year the Factors and Discounters Association saw its members total turnover climb 13% to over #64bn.
David Richardson, head of marketing at the FDA, says: ‘We’re disappointed that factoring doesn’t appear more in export markets, but our members’ business has doubled from #1.6bn in 1995 because we offer exporters the credit insurance as well as finance needed when you enter a foreign market.’
Joe Waters, a factoring expert with the PricewaterhouseCoopers receivable management group, says: ‘The UK factoring market may be growing, but the main players clearly haven’t invested the same amount of effort in their international capability as they have in the domestic market.’
Export finance is certainly a large, relatively untapped market for factors and invoice discounters, with the Organisation for Economic Co-operation and Development predicting a pick up this year of up to six per cent in value and four per cent in volume for UK overseas trade.
So what can a factor offer a UK company that is looking at how it is going to finance its export business and secure a long-term place in the global economy? ‘Finding an international market for its goods or services is only half the battle,’ explains Ian Varley, the international operations manager at the Bibby Group of Factors. ‘The victory involves a company ensuring that it gets paid following delivery – this is where export factoring can really make a difference.’ Factors argue their product is directly linked to sales, and provides the cash which could take months to come in to fund growth and meet new orders in a tough international market. They also offer the clout free-up small operations from the expensive and time consuming job of pursuing debt.
And late payment is arguably one of the main pitfalls a small to medium-sized business faces when looking to expand at home or abroad – without pay a company will go under and last year 10,000 went into receivership.
The Federation of Small Business last month found that only one in three UK businesses pay bills on or within the 30 days specified by the Late Payment Act. And if there are problems in the UK, there are greater ones even in developed markets like Europe, where average payment times are almost double in Italy at 83 days, 73 days in Spain, 65 in France, and 53 in Belgium.
Richardson says: ‘Late payment pales into insignificance when compared to a total default in payment, which is far more difficult to deal with abroad than it is here.’
Large factoring houses, such as Bibby and HSBC Invoice Finance, also offer a range of multi-currency facilities that can help fight the erosion of profit margins and other currency payment problems. Mark Hind, head of marketing at HSBC Invoice Finance, points out that language barriers are also a major stumbling block for UK businesses trying to build up business links on the continent. Varley agrees: ‘Everyone speaks English when it comes to buying the goods, but the communication fails when it comes to paying for them.’ Hind says: ‘We have an in-house team of linguists for our European market and correspondent agreements with factors to represent us in different countries who have the local specialist knowledge.’
Most export factors belong to two worldwide industry networks, the Factors Chain International, which has members in 50 countries and the International Factors Group which is represented in more than 130 states.
These bodies give factoring houses an international mechanism to work across international boundaries.
Andrew Watson, a partner who specialises in factoring advice at City solicitors Wilde & Sons, says: ‘These are very effective organisations that give UK companies a worldwide network and service.’
Waters agrees with the benefits of export factoring, but says the FCI and IFG are a loose organisation that operate with ‘varying degrees of effectiveness.’ He says: ‘In the UK, we have good company records, but you become reliant on what level of information is available in different countries, and even closer to home – such as in the Republic of Ireland – these are not always so readily available.’
He also points out that working out credit limits can be slow on an international level, because factors have to go to associate members and agree limits, and companies can’t always command the level of credit they need.
‘But, if you are based in Worthing and you need to collect a debt in Australia, the real threat an associate factor can exert to collect a debt is real benefit.’
Invoice financing has helped London-based distillers Martinelli expand over the last three years into an international exporter supplying three quality brands worldwide.
Martin Gill, who runs the London Gin Company, Edinburgh Gin Company and Loch Ness Whisky, says that cashflow is the most important element for a business undergoing a similar high growth period.
‘It takes a minimum of #50,000 to launch a new liquor product,’ he says.
‘And by using Close Invoice Finance we have been able to introduce the Princes Dry Gin from the Edinburgh Gin Company and the Loch Ness Highland Malt whisky products, which hasn’t been out of the top 10 in the whisky shops of Scotland.’ Gill saw an opportunity in the gin market created by the constant mergers of the larger companies, which he thought had lead to falling standards.
‘I saw a whole raft of customers not being looked after,’ he says. The London Gin Company label now exports 75% of its production abroad to countries including Japan, Bahamas, Norway, Egypt and Singapore.
‘They are served by highly experienced distributors, many of whom have suffered at the hands of the larger combines,’ says Gill. Martinelli has a 10-year plan to take 10% of the UK’s gin export market, and Gill expects invoice finance to feature in the first five years before Martinelli becomes self-financing.
Dundee-based Heyder International, manufacturers of mirrors and prints, used factoring to finance its export drive from the beginning.
The one-year-old company buys in moulds, mirrors and prints, supplying large retailers in the UK and Europe – its principal EU chain being Scandecor.
Exports represented 15% of Heyder’s #1.5m turnover by the first year of trading and are due to grow this year to 25% of a projected #2.5m turnover.
Managing director Paul Heyder and chartered accountant co-director Bill Burns are looking at North American markets and Heyder has just moved his 40-strong workforce into premises three times the size of the previous factory.
Heyder competes with cheaper eastern European frame-makers because of his delivery record, which has made price less important. ?:
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