What alternatives to factoring are there for chasing debts?
I run a consultancy business and have a lot of short-term contracts, so my cashflow is often very uneven. I’ve tried factoring, but the firm I’m using has upset some of my clients by chasing debts too hard. I don’t want to risk losing repeat business, but I can’t afford to be running out of cash when sales are low, and I’m keen on growing the business with the aim of ultimately evening up the cashflow. What are my options?
A. Kevin Weaver writes:
Factoring is a valuable tool for keeping cash flowing, but I appreciate the need for sensitivity when dealing with your customers. There are many financiers on the market to choose from, offering a wide range of products.
You could explore confidential factoring, where your customers are not aware that an outside party is chasing debts, as reminder letters and statements will use your company identity. This reassures customers that they are still dealing with your business directly and aren’t under any undue pressure. Then there’s selective factoring, where you can choose which customers are chased for payment and which are not. This would let you handle any sensitive customers directly, leaving the invoice financier to chase up the rest of your debts while you run the business.
Despite your best efforts, the credit crunch means some of your customers may take longer to pay, so it may be prudent to run another form of funding alongside factoring. If you have a strong case for the future success of your business and are willing to relinquish some of the capital in exchange for finance, you may be able to secure funds from venture capitalists or angel investors. This is a route that many businesses choose to go down, but beware of the fact that in exchange for capital, many investors will insist on having some say in how the company is run. Investors will also expect a share in profits for their collateral, which should be factored in to the decision.
While bank finance can also provide useful bridging funds to cover short-term cashflow issues, in the current climate you will have to provide security on overdrafts and loans, and banks will be quick to recoup their monies owed if you default on payments.
A blended solution, offering the best of each finance option, is probably the most appropriate for you. To save the time and hassle of comparing the options yourself, consult an independent broker or financial adviser, who monitors the market and will be able to provide you with professional advice on the best solution for you, based on your specific business needs.