How To Choose A Factoring Company

With the rapid growth in recent years of both the number of factoring companies, and the variety of different products that they offer, the range of choices for the user has increased dramatically. However, with that increase has come a more complex decision when choosing between different factoring companies, and products.

This article is concerned with providing the reader with a framework within which to make that choice when choosing a factoring company.

The Factoring Company

The list of factoring companies in the UK is very wide and can be divided into high street bank owned factors and independent factors. The high street banks that own factoring companies include many of the well known, household names, that you will recognise such as Lloyds Bank Commercial Finance, Barclays Bank, HSBC Invoice Finance and RBS Invoice Finance. Within the independent sector, there are a large number of factors that also differ substantially in terms of size. At the smallest end, a factor may have a handful of clients services by a handful of staff up to a large independent that may have thousands of clients and several hundred staff, across a number of nationwide locations. This complicates the choice further in that all independents are not of similar size.

How to choose a Factor (also known as a Factoring Company)

There are advantages and disadvantages with each sector. Below is a brief summary of the key considerations.

High Street Bank Owned Factors

Our research suggests that 51% of invoice finance users* find their way to invoice finance through their high street bank.

High street banks are substantial organisations and so their clients will benefit from this in terms of financial security. The chances of the factoring company failing or running out of funds is considerably reduced. However, there are also a number of potential drawbacks. Clients of bank owned factors often complain that the service is not as personal as they would like. In some cases the factor may take a call centre style approach to managing their clients, without a single nominated point of contact. In a few cases this call centre support has even been outsourced abroad which can lead to a further feeling of isolation for the client.

Also, bank owned factors often rely upon their bank network to provide the majority of their new business.

The size of these organisations, and the economies of scales that come with that, can often mean that they are often able to offer fine rates. Having said that, where there is a collections service required, some of our research findings show users having a preference for independents over banks**.

Many clients also state the old adage of not 'putting all your eggs in one basket', when they choose to factor with a different party from which they bank. In many cases, the client will retain a residual overdraft facility with their bank, after they establish a factoring facility, although this can often be "in case of need" only. Many clients are concerned that if their overdraft and their factoring facility is managed by the same bank, they could see both withdrawn simultaneously if their business should start to experience financial difficulties.

Lastly, you should consider the bank's risk policies or rules. We have come across situations where clients feel that a bank can be constrained by its "rule book" in situations where flexibility is needed. Havings said that, we have also had many examples of the bank owned factors providing great flexibility for our clients.

If you are seeking a well known name to provide your facility, a high street bank owned factor may be the right solution for your business.

Independent Factoring Companies

Independent factors are not owned by a high street bank but they may still be owned by substantial businesses that provide almost the same degree of comfort to you as a client. As part of the process of choosing a factor, it is important that you understand the ownership of the factoring companies that you are considering.

Clients often find that an independent factor can offer them a more personal, relationship based service. Indeed in our stuides of customer satisfaction levels, we have found satisfaction ratings to be 45% higher among users of independent providers**. However, this is not to everyone's taste and some clients are seeking a more transactional service that they can manage over the internet. There are plenty of invoice auction platforms and spot factors that can provide a selective approach. The independents are often reliant on client recommendation for new business.

The size of the business that the client is dealing with must be considered, too small and you could face instability problems but with size comes the challenge of maintaining a personal service and relationship. The factoring market has factors at all stages along this spectrum and one of our advisers can give you more information about the factors that you may be considering, or those that would meet your requirements.

Other Things To Consider

Another key aspect to consider is credit control, or the collections service (if you require this service). With factoring, this service normally comes as part of the service, although the way it is conducted can vary enormously. In some organisations there will be a credit controller dedicated to your account, such that you can replace your own staff with that individual and save money. In other factoring companies the collections service can be very different with pools of staff chasing debtors, so relationships are less likely to be developed with debtors.

In other cases, only the top few customers are contacted by telephone by the factor. In some cases, the factor's chasing is entirely handled by written automated letters and statements, with the client retaining the responsibility to make the telephone calls. This may be an acceptable arrangement if you have the resource to undertake the credit control, and you could argue that this might save money on the cost of the service. Either way, as a potential client you need to understand the level of service that you can expect, and the implications on the cost of the facility, so that you can make the best decision for your business.

Once again, our advisers will be able to provide you with guidance based on the actual experiences of clients that we have already placed with particular factoring companies.

If you don't want to use these services there are alternative forms of finance.

How To Choose A Factor

So to summarise, there are many aspects to consider when selecting a factoring company, who owns the business, how financially stable they are, how will you be serviced and how will the collections be handled. Many factoring companies will be able to provide you with case studies about existing users of their products that may be in similar industry sectors to you. They may also be able to put you in touch with existing clients that can tell you first hand about the quality of the service that they receive.

These are just a few of the questions that you might ask but we hope this will give you some assistance in making the choice. Our advisers are always available to guide you though the process, and our service is completely independent.


Sources: *Study of 100 Invoice Finance Users February 2015.
Invoice Finance Clients Survey March 2014 (100 Respondents All Existing Invoice Finance Users).

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Examples of just a few of our finance partners:

funding invoice
ultimate finance group
giant finance
lloyds bank