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Ten Questions to ask a factor

Factoring is assuming an increasingly important role in the financing of small-to-medium sized businesses.

But how do you go about choosing from an array of more than 50 companies all offering to exchange your trade debts for immediate cash? There will be a courtship period where both parties get to know each other before making a commitment.

The following questions might make it easier for you to decide on the factoring partner which suits you. This will be one of the most critical decisions you are likely to make in your business career ­ entrusting your sales ledger and future funding to a third party.

1. Are you a member of the Factors and Discounters Association (FDA)?
The FDA is the regulatory body for the industry and its forty members follow an established Code of Conduct and monitor members' financial stability. Members are often owned by financial institutions.

2. What proof is there that a Factor is financially stable?
Ask for a copy of the company's accounts and the names of its backers. You do not want to be in a situation where your Factoring company has a cash flow problem!

3. If the factor is an offshoot of my bank, will my existing overdraft arrangements be affected?
Factors owned by banks are financially safe, but an existing overdraft may sometimes have to be cut back so that the bank's overall exposure to your company is reduced. This can throw calculations into disarray and needs to be addressed as soon as possible. Ask yourself do you want all your finances from one source?

4. How does the Factor treat clients' customers?
You need reassurance that the Factors attitude towards credit control is not going to antagonise your customers, whom you have probably carefully nurtured for a number of years. Ask to speak to some of the Factor's existing clients.

5. How long does the Factor take to collect debts?
The average period for good Factors is around 60 days, whereas companies who do not use Factors take between 70 and 80 days to collect their own debts. A simple calculation will show the extra turn round of money you can expect.

6. How soon will I receive money after I have sent copy invoices?
With the larger factoring companies, due to the sheer volume of work, there can be a couple of days delay in making a payment. It should be within a day and clarification of this question can solve a potential problem.

7. Which invoices will be covered by the prepayment figure against invoices?
Factors have clear policies on unapproved invoices and customer concentration limits - establishing what these are at the outset avoids later misunderstandings. Invoices to a blue chip customer may be disapproved because they amount to a high percentage of your turnover. Factors are not questioning their financial stability when they are disapproved, merely preventing a potential problem if there is a dispute. Do not take the salesperson's word for it. Get it in writing.

8. Are there any hidden charges?
Sometimes Factors charge a re-factoring fee if debts are more than 90 days overdue, or use an expression "disbursements" to cover charges such as BAC's payments.

9. Is the cost reasonable?
The average full service factoring charge is between 0.5% to 3% of turnover (invoice discounting rates are slightly lower), but it depends very much on the industry and the number of invoices being processed. Work out the costs for a credit controller and remember money costs compare favourable to overdraft rates. Never decide on cost alone, as the quality of service in a sensitive area of business, such as the sales ledger, is vitally important. Quality is not expensive it is priceless!

10. Who is going to look after my account and if there is a problem are they authorised to help?
The Account Manager looks after the day to day running of the account, but it is also important to meet with and have access to the Factor's decision-makers so that any problems can be resolved without long-winded discussions up the line.

Above all, go and see the Factor and meet the directors. Ascertain if the directors are available to you at any time (the home telephone numbers of our directors are listed in our Operations manual).

REMEMBER . This is probably the most important decision you will make this year. Get it wrong and it could have serious consequences. Make sure you are going to have a financial partner who is financially sound, will work with you and share your hopes and aims.


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