Most factoring companies operate on a recourse basis, meaning that if the customer ceases to trade, the client is required to repurchase the debt. One would have thought that as the factor is taking little risk they would not be too restrictive on whom the client sells to, but unfortunately that is not the case and some impose credit limits on the customers with the sole aim of restricting the funding to the client.
With a recourse factoring facility the factoring company isn’t responsible for bad debts so there is no need for them to operate with stringent credit limits yet they do as the account manager will be under instructions to keep the level of funding as low as possible by setting low credit limits and refusing to fund any balance in excess of that limit.
With a recourse facility the factoring company will be taking the credit risk in the event of their client’s customer ceasing to trade so one would expect a more rigid attitude to credit limits but unfortunately with even more at stake some of the credit limits on offer from the major factors have been derisory.
Likewise, many companies have one or two customers that are responsible for a significant proportion of sales and some factoring companies will use that as an excuse to keep the funding levels as low as possible by imposing a concentration limit expressed as a percentage of the total outstanding debts and refusing to fund accounts in excess of that limit.
Factoring companies will proudly claim to fund companies up to 85% of invoices but statistics released by the factoring trade association showed nine of their members with an overall investment in their clients’ invoices of 50% or less, much of which is due to “creative client management”
One of the companies that recently approached us to find them a more commercially minded factoring company was turning over £2m per annum and was factoring with one of the High Street bank owned factors. This company was told that the factor wouldn’t fund any new customers in excess of £5,000 until such time as each customer had paid two monthly accounts. The credit standing of the customer was completely irrelevant and having won a substantial contract with Royal Mail the company wouldn’t have been able to fund it if we hadn’t replaced their factoring facility with one that did what it said on the tin.
There is a way through this maze that will cost you nothing so please click on the link for the solution from Factoring Solutions
Factoring Solutions
5 Torridge, Hockley, Tamworth, Staffordshire B77 5QL
Tel: 01827 707680