We recently posted on this topic and the head of MyCFO, Martyn Dominy commented on his personal experience which really deserves re-posting here in it’s own right…

I have personally been involved in running and operating four factoring facilities and thought some of my experience might be interesting for others.

Issues to consider are:

Disclosed versus Non Disclosed:
there are two types of factoring facilities - disclosed and non disclosed. Disclosed is when the factoring company sends the invoice to your customer and your customer knows the debt is factored. The factoring company also phones your customer and has direct contact with them. The other is non disclosed - you send your invoice to your customer and the bank, then the bank funds you 80% to 90% of the invoice value. When your customer pays the bank, the bank releases the balance owed to you.

Concentration Limits:
The next point to consider is concentration ratios. Banks will often say that once a particular debtor reaches 30% of the factored amounts, they will stop funding you on that particular debtor. This can be critical in a cash flow critical business - i.e. recruitment firms running contractor books. You must have spare cash or excess working capital to cover this type of situation. The concentration limits will change once that particular customer pays you.

90 Day Funding Issue:
If a particular debtor falls into 90 days DSO plus, some discount finance companies will no longer forward you funds on that debtor. It is very important to ensure your debts are collected quickly. This has the ability to severely restrict your ability to access funds.

Intercompany Transactions:
If you have companies within your group that engage in commercial transactions with each other, most of the banks will not factor or pay you money on those transactions. This is a very key point to consider as you are effectively removing access to cash flow if you have intercompany or intergroup transactions.

Offshore Clients:
Some of the banks won’t factor international transactions. If you deal with a lot of offshore clients, this could create cash flow issues for your business as you will need to find other means of cash to fund these transactions.

Facility Limits:
Most of the large players (St George, Commonwealth Bank, Westpac etc.) will set an upper limit for your facility. If your business momentum grows quickly, you may find yourself reaching the limit quite quickly. This can mean re negotiating and re applying for a new facility limit - a process that is time consuming and costly as you would need to go through the whole credit approval process again.

GE Finance actually offer a product that is slightly different and in my opinion, probably superior to the mainstream providers. They offer a service that is similar to Commercial Bills. They set an amount that you can draw down upon to fund your business - the liability to the bank is then reduced as you issue invoices and receive funds from the customer. It is a bit like an overdraft - rebadged and rebranded in a different way.

The mainstream providers will insist that you invoice your customer first, then access the funds. GE is slightly different in that you can draw down and then invoice your customers.

Administration of Facility:
You must stay on top of your game if you are running one of these facilities. They are complex in nature and time consuming. A business running a debtor book of approximately $8m should almost have a full time person collecting cash and maintaining this type of facility. The banks have very strict compliance rules and expect to have your accounts audited every 2 to 3 months. This is where a real time accounting system like Saasu can help. Your banker could have their own log in code to view your financial performance at their own leisure - this saves you time and resources as the bank won’t need to spend as much time on site with you.

You must ensure payments, receipts etc are recorded in real time when running a discount finance facility.

Cost Involved:
A typical interest rate in todays value is around 10.65% less 1.5% discount - cost is about 9.1%pa - depending on your risk profile. You will also pay a monthly admin fee around $2000 to $5,000.
The interest charge is similar to an overdraft (overdrafts don’t have the headaches but often are required to be secured with property). Under discount financing arrangements, the debtor book secures the debt. If you have a first class portfolio of blue chip clients, then you wont have any trouble accessing discount financing.

In my opinion, if you have access to an overdraft facility - use this instead of discount financing. If you use discount financing, you must ensure that you have spare working capital to cover situations like:

• Concentration limits being invoked
• Slow paying customers that fall past 90 days
• Lack of technically experienced resources in your

Your experience and operational efficiency using discount financing will depend on the requirements of the individual bank. Engage with each party you are talking to at a deep level. Don’t just speak with the Business Development Manager trying to sell you a financial solution - insist on speaking to the folks that actually operate the facility and get a deep understanding for the administrative requirements. This is key in the whole process.

You may need to adjust the way you do things to meet the reporting requirements of the bank. They will have specific requirements around file formats, your accounting system will need to be re programmed to cater for this - otherwise you will be on a crash course from the beginning.

I hope these comments have helped and would welcome any calls or emails if people need further help with Discount Financing.