Managing the collection process properly ensures that a business maintains the cashflow necessary to survive, says David Catley, and along with the granting of credit, continues as a mainstay of the Credit Management function.

Increasingly Credit Managers are not just charged with responsibility for their company’s day-to-day cashflow, but also for the overall strategic management of this aspect of the business.

By putting in place a working capital facility to ensure that funds are on hand to meet supplier payments, even if your customers are late, your cashflow can be assured, allowing supplier payments to be made on time, every time.

Invoice Discounting is a working capital facility of this type that provides the business with a flexible line of credit which rises and falls in line with its debtors ledger. It allows funds to be drawn against the value of the unpaid debtors and repaid as the debtor settles their account.

The credit and collection processes are maintained in-house, with management reporting to the financier on a regular basis advising them of debtors ledger movements.

Because the credit function is maintained by the business, Invoice Discounting is a very low cost line of credit that only attracts interest/discount charges on funds actually drawn down.

Importantly, it is also completely confidential, so your customers won’t know about it. This means they can’t use the knowledge that you have a stand-by-finance facility as a reason to defer payment for another week or two.

But if they are late with payment, your commitments to suppliers won’t be compromised. No more holding back supplier payments because your largest customer is a few days late!
 
 

OUTSOURCING YOUR WAY TO A STRONG CASHFLOW

Outsourcing is probably one of the most significant business trends of the last decade.

Throughout the economy, in both the public and private sector, organisations have outsourced dozens of non-core functions, including accounting, fleet management, marketing and information technology management – to name just a handful.

By outsourcing these functions to experts in that particular field, businesses have discovered that they can reap financial benefits and efficiencies.

And, of course, they no longer carry the overheads and on-costs of having those resources in-house.

Credit Management is another area where there are efficiencies to be gained through outsourcing.

For example, by using factoring or other cashflow finance facilities, a business can outsource its debtor management functions, while achieving a quantum improvement in cash-flow at the same time.
 
 

Credit managers who are examining factoring or other forms of cashflow finance may wish to consider the following points when assessing the merits of different facilities and finance providers.
 

1. Flexibility

 

 

Does the finance provider have a range of financial facilities to meet your needs?

The main cashflow finance products are invoice discounting and full-service factoring. With invoice discounting the client retains responsibility for collections and debtor administration.

Full service factoring, as its name suggests, means the factoring company should provide a complete debtor administration service. Specialist cashflow finance companies usually provide both services, but some banks only provide invoice discounting.

If your business is exporting – or has aspirations to develop export markets – you should also ask if international factoring services are provided. International factoring allows you to sell on multi-currency open account terms and provides immediate cashflow against export sales. It also means you don’t have the thankless task of chasing debtors on the other side of the world.

International factoring arrangements vary from company to company.

For example, Scottish Pacific is a member of Factors Chain International and the International Factors Group and therefore uses their networks to provide international debtor administration and collections. Other companies would have differing arrangements.
 
 

2. Size does matter!


Is the finance provider large enough to guarantee stability and service?

If your business has customers in more than one state, you will need a factoring company with operations in those states. Be sure to check that these interstate offices include administration operations and are not just sales offices, because your customers will want to deal with someone in their own state if they have an account query or payment problem.

Factoring – particularly the debtors administration side – is a labour intensive business, so the size of your factoring company can have a bearing on how well your account will be managed and supported.

How do you measure the size of a factoring company? Ask them about their staff numbers and market share, and check their claims with competitors.
 
 

3. For better or worse…


Will your factoring provider still be there for you in a few years time?

Historically, some of the bank factoring organisations have gone in and out of this market, according to the health of the small business sector and the economy in general. This happened as recently as the recession in the early 1990s when a number of banks suddenly closed their factoring and invoice discounting services when they decided to go back to "core" business.

One of the advantages of using a specialist factoring and invoice discounting company is that they are extremely unlikely to withdraw the services that are their sole reason for being in business.
 
 

4. Don’t put all your eggs in one basket


Will your financial facilities be cross-collateralised if you obtain a factoring or invoice discounting facility from a comprehensive financier such as a bank? If they are directly or indirectly collateralised default on one facility may bring your other facilities into default.
 
 

5. Bricks and mortar


Will your cashflow finance provider require property security. Some cashflow finance providers do not require property security, but others do. Its worth checking right at the start whether the product being offered is truly "debtor finance" and therefore secured against the debtors of the business.
 
 

6. Upper limits


Does the cashflow finance provider have an upper limit on how much they will advance? Some providers will set an upper limit in dollar terms, which can cause problems if your business experiences sudden growth, either through large orders or seasonal fluctuations.
 
 

7. Payment arrangements


What proportion of your debtor invoices will you receive upfront? Some finance providers will advance up to 90 per cent of the invoice value, while others limit their upfront payment to 80 per cent.

The remaining 10-20 per cent is known as a "retention" and is paid to the client after the invoice is settled. When assessing the merits of different cashflow finance companies, you should compare their arrangements for paying retentions because some companies make these retention payments within a day of the invoice being paid, but others only pay them on a weekly or monthly basis.
 
 

8. Transparency and accessibility


Can you obtain immediate access to your account details – and your cash – via the internet? The development of the internet means this is now possible, so you should ask prospective finance providers whether they are utilising these developments to improve client service. At Scottish Pacific, our Open Account service provides clients with direct access to their debtor records, including collection note details, and allows electronic fund transfers at the client’s discretion.

If there is an online service, be sure to ask whether there are charges for its use and whether it is available around the clock or just during business hours.
 
 

9. Client references


Ask prospective cashflow finance providers to put you in touch with clients in your own industry. If the finance provider already has clients in your industry, they will have a better understanding of your business and your industry.
 
 

10. Industry associations

 

 

Be sure that any prospective finance providers are members of the Institute of Factors and Discounters.

In recent years, cashflow finance has been one of the fastest growing sectors of the Australian finance industry, especially in the business finance area.

The major banks have moved back into this sector of the market, recognising that their traditional financial facilities no longer meet the needs of modern small and medium sized businesses. For example, the insistence on property security overlooks the fact that many successful businesses choose not to invest in bricks and mortar these days.

In the 1980s, factoring and invoice discounting had a "cowboy" image of last-resort lending at high interest rates to companies that could not obtain bank finance because they had inadequate "security".

Times have certainly changed since then and the cowboys have been shaken out by the growth of companies like Scottish Pacific and the development of cashflow finance products by banks and other large finance companies.

The establishment of an industry body, the Institute of Factors and Discounters, has also played a significant role in lifting professional standards.

A WORD FROM THE EXPERTS

The credibility of cashflow finance is illustrated by recent public comments by two of Australia’s most respected business commentators.

Prominent accountant, Curt Rendall, had the following advice for companies experiencing cashflow problems. "The answer to your prayers may well be factoring."

"Factoring is not much more expensive than a bank overdraft, yet it gives its user the freedom to fund growth beyond the painful bricks and mortar threshold," wrote Rendall in the accounting magazine, Charter.

Lamenting the banking sector’s poor performance on SME finance, Rendall also described factoring as a financial product which has "come of age".

Rendall is certainly well-placed to be commenting on small business finance – he is chairman of the Institute of Chartered Accountant’s national SME committee and deputy chairman of the Small Business Development Corporation of NSW.

Meanwhile, Phil Ruthven, chairman of IBIS Business Information, described factoring finance as one of "the new rules" of successful modern businesses.

Quoted in Business Review Weekly, Phil Ruthven said the cost of factoring was about the same as the overdraft rate – currently 9 per cent. "People say to me: ‘That’s a bit high because bill finance is nearer 6 per cent’. The answer is that 9 per cent is hardly expensive when companies should be making nearer to 20 per cent with their own capital," said Ruthven.