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Factoring beginning to replace bank overdraft

The role of the bank overdraft as a source of funding for the ongoing requirements, or one-off injections of cash, of small to medium-sized businesses could soon be a thing of the past, according to the head of one of Britain's leading independent factoring and invoice discounting houses.

Leslie Bland, previous Managing Director of Close Invoice Finance, the factoring and invoice discounting arm of Close Brothers, the merchant bank currently the darling of the City, maintains that the bank overdraft was never meant to finance business on a day-to-day basis; it has merely evolved into today's position.

And he suggests that as banks nowadays, to a great extent, have turned into faceless wonders unable to inject flexibility and the personal touch into their every day dealings with customers, asset based finance will take over.

"Sadly, too often they operate the fine weather umbrella policy," Leslie Bland asserts. "They maintain they provide an extensive service, but it's only available when they want to give it - while the going is good and the weather is fine the offers of funds are there, but when things get tough and help is really needed, the umbrella can be taken away."

It is no surprise that Mr. Bland heralds asset based finance in the form of factoring and invoice discounting as the viable alternative to occasional or ongoing business funding, pointing out that the popularity of the overdraft is declining. Figures for the past few years have shown that while demand for overdrafts has consistently fallen, funding by factoring has shown dramatic year-on-year growth.

"There is nothing 'hit and miss' about using the sales ledger to finance a company, in fact it is probably the most honest all-round method of acquiring funds," he maintains. "If the sales slow down then funds slow down also, giving immediate warning of problems.

"However, because many factoring companies, particularly the independents, have the flexibility to react to any unusual needs of their clients, they are able to give short-term assistance based on their knowledge of their customers' businesses And the mutual trust and confidence that has been nurtured between the two."

Factoring is also as simple as an overdraft: factoring firms buy their clients accounts receivable, pay over a percentage of the invoice value immediately (anything up to 80%) and the balance when the customer pays.

A discounting fee is applied on a day-to-day basis for funds advanced at a rate similar to a bank overdraft charge and a management fee for servicing the account is calculated on invoice turnover.

The cost of finance is broadly the same as the bank overdraft, and often cheaper, credit control is part of the package and bad debt protection is an optional extra.

Businesses usually turn to factoring to provide an initial lump sum (up to 80% of all outstanding invoices on the sales ledger) which may be used for company growth projects, capital expenditure on equipment or property, or even pension contributions and the like.

Thereafter the funding is available on an ongoing basis, providing regular cashflow without the worry associated with a bank overdraft repayable on demand.

Leslie Bland believes that factoring and invoice discounting is the way forward for small to medium-sized companies.

He says: "Whilst we may hear many platitudes about banks being concerned about the financial welfare of their customers they do retain the right to play the role of Lord and master, without the flexibility associated with what we call 'the old fashioned bank manager'.

"It's very much a case of the leopard claiming to have changed its spots, but while the principal product on offer remains the overdraft, the spots are likely to remain."


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