5 Key Differences Between Factoring Companies
The differences between factoring companies are far greater than you might imagine. Below we have described the 5 key differences that you should be aware of. This article explores each of them in detail to help you make the decision as to which factoring company you should use:
1) Service Levels
This is the one that many new clients underestimate. Instead they make the decision based on price, overlooking the quality of the service that the factor offers. This can be a critical mistake as service levels vary dramatically. The relationship with a factor is not like that with a mortgage provider. They don't just provide the money and that's the last you hear from them. A factoring company will be involved, to a greater or lesser extent, in collecting your outstanding sales invoices, hence they will have a relationship with your customers. it is therefore vitally important to find a provider that has a good track history of delivering a good level of service.
We have conducted independent customer satisfaction research among randomly selected customers of many providers and we have seen average ratings (out of 10) vary from 4/10 up to 9/10 (on average across a sample of clients). That is a dramatic shift of 125% between providers. These are likely to create very different perceptions of service amongst customers.
The other aspect that prospective users often fail to understand is that not all credit control services are equal. In some cases it will be a full credit control service that included both paper based chasing and phone calls, comprehensively across your sales ledger. On the other hand, some services offer credit control that only equates to the top few largest accounts being chased. The former could enable you to outsource your credit control completely whilst the later will require you to supplement the service with your own resource. Again, two very different propositions.
Pricing is of course important, and it can vary considerably between different providers. In our mystery shopper research we found a 49% pricing differential between the top and bottom of our table of providers quoting for the same recourse factoring deal. That means the most expensive quote was nearly half as much again as the cheapest.
The other facet of price is exactly what you are being charged for. There are all manner of ways of packaging the fees that can make them seem more or less attractive to the layman. There are also options like selective facilities, that allow you to choose which invoices to factor. The advantage is that you only pay for those that you factor but if you have an ongoing cash flow requirement that might not be the most cost effective option for you.
3) Funding Levels
Different providers will offer different levels of funding. Again you cannot necessarily just compare the headline rates e.g. 85% versus 90%. Some providers will (or won't) include other restrictions in their funding formulae such as prime debtor restrictions, funding limits on particular debtors or other reserves against your availability.
Some providers offer additional "top up" funding products, such as cash flow loans that can boost your funding percentage beyond normal levels. One provider is currently offering 100% funding for life (in some cases).
You need a working knowledge of all the practices used within the sector in order to be able to compare "apples with apples".
4) Risk Appetite
The factor's risk appetite will affect:
- Which clients, circumstances and sectors they will finance - providers will take different views on previous poor credit history. Some specialise in working with clients that have historic failed companies, CCJ and similar, whilst others look for a clean credit history. Some require you to be a homeowner, which others take a more liberal view.
- The amount of funding they will provide.
- The amount of additional security they will want - some take personal guarantees, some will not - others will limit the financial value of personal guarantees or will take fraud warranties instead (you are only liable if you commit a fraud in such cases). Debentures are common place but again not in all cases.
This is a very broad category but includes their physical structure, do they have an operational office near you in case you have a problem? Or are they centralised or using a more call centre approach to managing their clients?
Also, you may want a company that is backed by a well known brand e.g. a bank or you may prefer the idea of a small independent company, or some point in between. Similarly, some may be members of the ABFA (which has now become part of UK Finance) or a similar industry body. The ABFA has a complaints process that can involve an Ombudsman if necessary.
The good news is that whatever your requirements, there is normally a funder that can provide what you need. There is a lot of competition in the sector so it is worth shopping around the try and get a good deal from you factoring company.