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CREDIT WHERE IT'S DUE

6th July 2006, Page 48
6th July 2006
Page 48
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Page 48, 6th July 2006 — CREDIT WHERE IT'S DUE
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Which of the following most accurately describes the problem?

Factoring is said to offer hassle-free solutions to hauliers' cash-flow problems, but how effective is ft in practice? Andy Moore speaks to four factors to see if their services can make money talk rather than squawk.

Imagine running a haulage business where all customers paid up on the nail,your turnover was the same every year,and the same bills arrived on time every month.

Sadly, that is just a dream. In reality, there are times when every business -no matter how efficiently it is run could benefit from an injection of hard cash, and factoring is one way of achieving this.

Factoring can release money for expansion or other purposes. and it can provide fast prepayment against a sales ledger. But the biggest advantage of factoring is that it improves your cash flow, which can be a godsend for businesses that are short of working capital.

A business owed i500,000 might get £400.000 or more in just a few days. After signing the agreement. the factor will typically agree to advance up to 85% on approved invoices.

Factors can be independent or subsidiaries of major banks and other financial institutions. Whatever their background they are able to review a company's financial situation and business plan to evaluate its suitability for this service.

Most factors require three months notice to end the service and some have notice periods of up to a year, which could he expensive.

And that's not the only drawback — factoring is an extra link in the payment chain, so queries and disputes may take longer to resolve.

Overall. however, factoring must have a lot going for it as the sector is currently worth i142bn a year. Some 2.475 factoring clients are involved in transport and a further 9,000 in distribution, according to the Factors and Discounters' Association (FDA).

FDA CEO Kate Sharp explains:— the haulage industry is a major sector within factoring because operators require advance funds for capital such as diesel, wages and truck purchase.

"They may have to wait up to 60 days before being paid.This puts a strain on cash flow. Hauliers are well suited to factoring instead of overdrafts to fund business.

The FDA advises that operators should have the right credentials before taking the plunge into factoring. Before signing on the dotted line, they need to be aware that there are two main types: debt factoring and invoice discounting.

Selling invoices

Debt factoring involves selling invoices to a third party. In return they process the invoices and allow companies to draw loans against the money owed to the business.

This system is commonly used by companies to improve cash flow, but can also be used to reduce administration overheads.

Invoice discounting is an alternative way of drawing money against invoices, but in this case the client retains control over the administration of its sales ledger. As well as providing ftnance, invoice discounting offers valuable support services and credit insurance.

The Bank of Scotland (HROS) offers factoring and invoice discounting to hauliers of various types and sizes throughout the UK. Gordon Ferguson.a sales manager from HBOS factoring, says:"We aim to he as aggressive as possible in terms of the percentages we fund against. N ext-day funding is also available to customers seeking immediate availability of cash. "Our lending systems are also web-based. giving remote access to mobile companies such as hauliers."

While HBOS factors on a case-by-case basis. for 'clean' ledgers it can deliver up to 90% of the invoice value, working with operators that have turnovers of more than £50,(XX).

Provided the operator requires a working capital that HBOS can provide. the bank places no upper limit on a business's total turnover. Ferguson adds:"The nature of the haulage industry means there is a demand for capital funding. Because the industry is [based onj debtor-led funding. many financiers look to discounting or factoring as the right means to fund a capital cycle."

One aspect of the haulage industry that is suited to factoring is the traceability of paperwork throughout the supply chain. Order sheets, consignment stock notes and proof-of-delivery forms all help to make the payment process easier within the confines of factoring.

HBOS provides clients with a remote account manager who can visit companies at their premises or even at truckstopsits Small Business Offering suits owner-drivers. HBOS works to funding periods of 90-120 days —or longer if required.

The FDA advises hauliers to check the length of factoring agreements.While some factors will charge a very low price, they may tie the customer in for a long period. Conversely, those that charge more but have shorter notice periods might be more appealing as a road transport business can change dramatically within the first few years of trading.

No negotiating power Hauliers are renowned for paying large amounts of capital up front while having to wait what seems like aeons to be paid. Sharp believes there is an increasing division between large and small businesses— the big boys can generally dictate terms and conditions, while the one-man bands simply don't have the negotiating power.

Supermarkets are a case in point. Hauliers several tiers down the supply chain may have to wait until a long line of customers have been paid before their payment arrives.

"Couriers contracted to large companies that ask for 90 days' credit expect to receive 90 days' credit," Sharp points out."If this is not freely available they will go somewhere else. Freight firms that use factoring agents tend to be smaller companies. However they must comply with the demands of their customers to stay in business.They have increasing demands put on their cash flow.

Factoring is well suited to the gradual expansion of a new business. Unlike a loan, the funds available from factoring grow as the business grows. "Factoring is becoming increasingly popular because more banks are providing invoice finance as a more sensible means of funding business," Sharp reports. "Whereas £50,000 can be advanced on the basis of a loan, the return from factoring could be .£90,000 from an invoice finance facility."

City Invoice Finance works closely with Alliance and Leicester to provide hauliers with a range of products.The haulage sector represents about 10% of the company's business.While conceding that its services are more expensive than banks, it claims to offer a higher ratio of staff to clients.

"We will advance 85% of the gross amount of the invoice to hauliers; we offer both factoring and invoice discounting," says regional manager Cyril Ryder. "Invoice discounting is run on a confidential basis This is where hauliers are responsible for collections. The arrangement is more suited to larger operators that know their business inside out and have effective systems in place, including credit control."

Quick and simple For less sophisticated hauliers who may only collect money as and when it is required, their sales ledger can be contracted out to City Invoice Finance. The haulier can then be issued with reports on companies disputing their invoices.

"Unlike a bank where most decisions are tied up in bureaucracy with underwriters, we can make decisions very quickly," Ryder says. He adds that factoring can benefit hauliers by assisting them to pay bills on time, thus bolstering their credit rating.

GE Commercial Finance claims to be the UK's largest independent factor.As well as invoice discounting, it is able to lend against business assets such as vehicles. Because the company has fewer customers than banks, it says it is in a better position to offer one-to-one support to hauliers.

According to business development manager Andrew Rutherford: "We can be more flexible in catering for our customers' needs. Our advanced rates extend up to 90% against the outstanding debt. We also offer a collection service where we collect debt on a client's behalf."

Rutherford believes that a key advantage of his factoring services is that a client can draw funds on the day the invoice is raised.

While GE Commercial places no capon the amount that can be borrowed against projected growth, it claims to offer higher advanced rates than.some banks. It is also able to bolt on additional means of funding against other assets — Rutherford believes this can help struggling hauliers ride out financial storms.

Foodstuff specialist David Maxim Haulage has been using GE Commercial Finance for more than four years. It runs 50 vehicles from its Midlands hub.The operator discounts its invoices daily and is advanced with 85% of the gross amount of the invoice.

"Factoring is a suitable means of stabilising our cash flow," says financial controller Diane Wilson. "The service can create funds, which we reinvest in company assets.This can be for investments such as lorries.

"The only drawback with factoring is that the service is expensive. But because we can be paid instantly rather than within 60 days, we have peace of mind. Factoring can help fund huge outgoings such as PAYE."

David Maxim Haulage turns over £4.5m year; Wilson warns that invoice discounting is not such a good idea if a business is not making a profit.

Some factoring companies even offer their services for international sales.They will typically work with a partner abroad that handles payment collection in the country where the export originates.The services of a local agent can prevent any problems with differences in laws, customs and language.

In terms of credit limits and processes, there is no material difference between local and international factoring and invoice discounting, though factors might approve a lower level of prepayment for export invoices than for local sales.

Funding for exporters

The Royal Bank of Scotland (RBS) has recently started funding exporters, many of which are selling UK-made products in Europe.

"We're able to fund, collect and protect against invoices for goods sold outside the UK," says accountant director Ian Hepworth. "For operators shifting backloads on the return leg from Europe, we can raise an invoice from a UK to a European entity. We can credit-check customers and provide baddebt protection against overseas debtors."

Hepworth adds that dealing with overseas debtors can be a challenge, especially when trying to set a funding or bad debt protection limit. However, RBS has a dedicated customer-service leant that can speak with debtors in their native language. IIIII CONTACT Credit Services Association: www.csa-uk.com Money Claim Online: www.moneyclaim.gov.uk


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