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• 08 Jul

  Are Your Customers Using Factoring?

  Factoring is a business finance product that is used by a wide number of UK businesses. It works by releasing cash against unpaid sales invoices, which is called a "prepayment". In addition to the pre-payments, with a factoring service, the customer receives credit control support from the factoring company - they chase up debtors for payment so you don't have to.

  Are Your Customers And Suppliers Using Factoring?

  If you want to know if your customers and suppliers are already using factoring, there are a number of ways that you may be able to tell. No facility is 100% confidential. The first is that there will normally be an assignment clause added to their sales invoices. So you are only likely to see these for your suppliers. An assignment clause is a block of text which states that you have to make payment to the factoring company, to clear your debt. Assignment is a process by which a company can "assign" their invoices to another party, such that the other party has the right to receive payment in respect of those invoices.

  To make things more complicated, some facilities operate on a confidential basis, even if the provision of a credit control service is part of the facility. Confidentiality means that the factoring company will carry out their credit control activity in the name of their customers' business, And all paperwork will carry the branding of the customer's business. Therefore this can make it very difficult to tell if they are using factoring.

  Companies House Charges And Debentures

  Another way that you can tell if either a supplier or a customer is using factoring is by looking at their Companies House filings. In the majority of cases, factoring companies will take a debenture or a charge over the book debts of their customer, if the customer is a limited company. This is a form of security that means that in certain circumstances the funder will be entitled to take control of the asset over which they have the charge or debenture. This often stands behind the assignment, to ensure their rights to the book debts.

  Details of these charges have to be filed at Companies House, for limited liability companies. You can use the search service at Companies House to search for, and view these charges: beta.companies house.co.uk. If you look at our list of invoice finance companies, should any charges appear from any of those funders, against and customer, is likely that they are using a facility. However, once again, this is not 100% reliable. There are invoice finance Providers that do not take a charge, hence nothing will be registered at the company's house. Also, if the supplier/customer is a sole trader or partnership there may be no records at Companies House.

  Lastly, you sometimes find that there will be a note in the filed financial accounts of a company about using factoring or invoice discounting - again this is not consistent.

  Improving A Customers Cash Flow Position

  The main reason for wanting to know if I customer is using factoring is to understand how good their cash flow may be.  If they are already using a facility, they should be getting prepayments against their sales invoices as that raises them, enabling them to pay you promptly. If you are having problems getting payments from a customer, you could consider introducing them to a factoring company by using our introductory service. If we can find them a facility, their payment performance to you may well improve.

  By Glenn Blackman