Corporate funding

One solution for small firms experiencing real cashflow difficulties

As the challenging economic climate takes a firm hold, the gap between companies issuing an invoice and receiving payment is lengthening, causing many small firms to experience real cashflow difficulties.

Research from the Asset Based Finance Association (ABFA) in December 2008, found that 28pc of small companies reported payment periods of 40-49 days, compared to just 23pc that are still receiving payment in the more normal period of 30-39 days.

Delayed payments add to the pressure currently felt by businesses and may prevent company expansion, or in the worst case scenario, cause the business to fail. This is where factoring can help.

Factoring is one solution that could provide a business with many benefits, including increasing cashflow. Factoring is where a business sells its invoices to another firm and can provide a much needed cash injection and provide almost instant working capital.
As a result of the credit crunch, with banks lending less, the flexibility of factoring can be a key advantage.

Whereas a loan is based on the company’s asset backing, factoring looks at the value of invoices, providing funding to those clients with successful sales orders.

Once an invoice has been issued, up to 85pc of the value can be advanced to the company with the remaining balance being transferred once the debtor has paid.

The amount of funding needed by a company can fluctuate according to the business it is conducting. So, if there are seasonal peaks in cashflow, funding requirements will alter, and factoring could meet these needs. Or, if the turnover of the company is growing, the cash facility grows with it, unlike a bank overdraft which can be reduced or withdrawn at any time.

The factor takes on the responsibility of running and maintaining the sales ledger and thereby becomes an extension of the seller’s accounts department. Many smaller firms do not have the resources for a specialist accounts team and it can by helpful to the business to have the ledger run by experienced personnel, and freeing up staff to concentrate on other areas of the business.

The cost of factoring is very similar to a normal bank overdraft rate, which tends to be about 3pc over the base rate. Figures from the ABFA show that this form of corporate funding continues to grow and dominate the funding market.