Is factoring for me?

We are a £31m turnover distribution business, with four accountants and an FD who manage all of our accounts and credit control. Our FD has suggested we move to factoring in order to cut out the headcount and costs in our accounts department. We have about 500 active customers and I’m finding it hard to gauge how much internal resource we will need if we do change over. What’s your advice?

A. David Richards of IGF Group writes:

The outsourcing of administration tasks in SMEs is becoming ever more prevalent in specialist areas, such as credit control. Savings can be achieved, but at the expense of staff so it’s not a decision to be taken lightly and will require consideration of employment legislation.

The cost of outsourcing this sales ledger administration in full, including regular chasing of all 500 customers, should initially equate to the cost of one-to-two staff members.

Several factors will only selectively chase outstanding debts as they see fit. If the company is to outsource effectively this point needs clarification with the provider prior to sign-up. Furthermore, the outsourced collection facility must not upset your customers so the tailoring of the chasing processes to your requirements must be discussed in detail.

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One person needs to liaise with the factor regularly, downloading sales ledger information and dealing with queries, but this should not involve more than a couple of hours a day.

Debt turn improvements by a specialist can create even greater savings, and some factoring providers now give service guarantees.

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