5 Most Common Mistakes When Setting Up a Factoring Facility
A lot of our clients have been disappointed with their first experience of factoring and come to us with the hope of improving service levels, reducing costs and improving cash flow.
What we do see are some common mistakes that a lot of businesses make when setting up their factoring facility. Let’s look at the 5 most common mistakes:
1. Businesses do not always consider total costs when setting up a factoring facility
When comparing the headline rates of service fee and discounting fee, they do not necessarily consider additional fees and disbursements that may be charged. In short, the cheapest headline rates in no way indicate the cheapest facility. Some lenders service fee is all encompassing and includes audits, debtor assessments, system access, etc. While other lenders charge for each service in addition to the service fee. You must consider total costs.
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2. Businesses do not understand how lenders calculate the funding
Not all lenders apply the same rules so this is really important. Similar to 1 above, the headline prepayment rate can be misleading as it is applied to eligible debt. The more important question is, “what is eligible debt?” Different lenders have different ways of calculating this and as such there will usually be a lender that is best suited to your own business. The challenge is finding that lender and structuring the facility in a way that maximizes cash flow. You must consider what can restrict your funding or reduce the eligible debt.
3. There is a whole market of invoice factoring providers and each has their own unique offering
Some clients just seem to sign up with the first lender that shows interest. It is important to use this market to your advantage to ensure you have the best possible deal for your business. That means ensuring the facility is properly structured and properly priced so that cash generation is maximised and costs are minimised.
4. Some clients only consider their own bank feeling that they will be repaid for their loyalty
From our experience that is very rarely the case. It is important to consider all your options and do what is best for your business rather than what is best for your bank and your bank manager’s bonus.
5. Signing up for too long a contract
We often speak to clients who are unhappy with service levels or fees but who have signed a 3 year contract. The norm is a 12 month contract with a 3 or 6 month notice period. There is no need to sign up for any longer and if you have any element of doubt please ensure you negotiate a shorter contract. If the lender is confident they can deliver what they have promised they should have no issues.
If you are looking to set up a new invoice factoring facility or you wish to change providers please contact us.