Invoice finance and factoring are becoming mainstream alternatives to overdrafts, term loans, letters of credit and even private equity.
After burning through a bank loan of £60,000, David Allon thought it might be time to talk to a factor. Six months on from launching Driverwise, a business that recruits temporary lorry drivers, he had sales of £10,000 a week, but kept finding himself out of pocket. The reason was that Allon and his partner, Marc Hedley, were in the uncomfortable position of paying their drivers every week and then waiting 60 or even 120 days for payment from fleet owners. To keep going, Driverwise needed money upfront.
If he went to the bank, Allon reckoned it would mean asking for a loan of £300,000. Instead he contacted three factors last September, choosing the one who took the trouble to sit down and understand his business.
By April this year, Driverwise was regularly taking £30,000 a week, £100,000 when it was busy. ‘We could not have grown as fast without invoice finance,’ Allon says. ‘We opted for the whole package. Factoring is easier for us and offered us the option of credit control.’
Driverwise currently has 300 drivers on its books, placing them in over a hundred different companies. ‘By specialising, we can recruit all day without getting sidetracked. There is a driver shortage throughout the country, particularly with the introduction of the Working Time Directive. We are aiming to open a branch a year, which we could not do without our factor.’
Early stage
For early-stage ventures like Driverwise, overdrafts are often restrictive, says David Moran, managing director of Cattles Invoice Finance in the south-east. ‘Bankers don’t have much to hang their hat on.’
Because factors are closer to assets and customers, he argues, they can offer advances of up to 85 per cent on funds, even to enterprises without a track record. As a factor, Moran will then pre-pay invoices and run the sales ledger, allowing entrepreneurs to get on and drive sales.
He only tends to deal with enterprises that are selling on credit terms. ‘The nature of the asset is that it must be fundable without any continuing expectations from the debtor. You should be able to sell it and forget it. If there are ongoing contractual expectations, life can get difficult for us.’
Working with new ventures where the chances of failure are high, Moran protects himself by looking first at the sales proposition and then at the quality of the management team. ‘Because factors receive money from debtors and monitor invoices as they come in, we should not leave ourselves exposed if there is a failure.’
Credit charge
For a factor to run your credit control and pay an advance on your invoices, two charges normally apply. You pay 0.4 to one per cent of turnover depending on your type of business and you are charged two to 2.5 per cent over base rate on cash advances.
For companies with weak financial management, this can represent good value, particu...
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