SOURCE: www.timesonline.co.uk
KARAN BILIMORIA is the face that the
deeply unfashionable factoring industry has been looking
for.
The founder of Cobra Beer is a cheerleader
for this form of finance, which he says is ideal for an
ambitious small business unable or unwilling to tap into
more mainstream sources. “It is a grossly under-utilised
route which more companies should consider,” he
says.
Factoring enables companies to raise
capital against unpaid invoices. Gradually, it is starting
to shake off its image as the last-ditch solution for
companies close to breaking point.
More than 33,000 small and medium sized-businesses
used it last year.
Bilimoria turned to factoring seven
years ago as a way to boost growth without handing over
a hefty chunk of shares to venture capitalists or business
angels. He still uses the service today.
Figures from the Factors and Discounters
Association (FDA) show that the total value of invoices
assigned to factors in 2002 was £118 billion compared
to £15 billion in 1992.
So how does it work? Typically, the
company assigns all of its invoices to the factor, who
then advances up to 85 per cent of the value of the debts
upfront. The factoring company takes control of the sales
ledger and chases up the debts. When the customer pays,
the company hands over the balance, minus a fee, to the
entrepreneur.
But, the extortionate fees charged
by less reputable factoring providers and the swingeing
penalties which can be imposed if things go wrong, mean
that it remains a risky form of finance.
For cash-thirsty smaller companies,
the main appeal of factoring is that it enables them to
raise more money against their debts than they would do
from a bank.
“Businesses can raise around
80 to 85 per cent of the debtor book compared to around
40 to 50 if the business was borrowing from the bank,”
explains Dave Totney, sales director for Lloyds TSB Commercial
Finance. “It speeds up cashflow by eliminating the
time lag between the issuing of an invoice and its settlement.”
He believes factoring is ideally suited to fast-growing
small businesses with turnovers of up to £2 million.
But for the right “fit”,
the business must have certain kinds of debt. “Factors
work on the ‘sold and forgotten principle’
— so a temping agency is exactly the right kind
of business for factoring but a firm dealing with lots
of contracts would not be,” Totney explains.
