ICSM Business Cashflow Feature: haulage firm brought down by the cancellation of a factoring agreement – the pitfalls of factoring outlined

By Harry Mottram: If you can avoid it don’t factor your invoices is the message that many in business will tell entrepreneurs and new businesses and they have a fair point due to the down sides. There are very good reasons why some firms and sole traders factor – partly it is convenient and allows them to get on and run their business and partly it gives instant cashflow. But of course, there’s a cost. One firm that became unstuck in January is the haulage contractor Brit-Pol of Lincolnshire whose use of factoring hastened its collapse.

Writing in the trade website Motor Transport Chris Tindall wrote: “The company, which was incorporated in 2011, had been growing for several years by this point and it entered into a factoring agreement to enable it to receive 2.8m Euros per month. However, the administrators said this facility was terminated due to a breach of agreement at a time when the international haulier was turning over £16.3m and making pre-tax profits of £1.2m. This had a huge impact on cash flow and so Brit-Pol worked with a new accountant in order to restructure its business and hopes were raised that its liabilities could be settled by May 2022, keeping all 250 staff in employment.”

The firm had other major problems but clearly relying on factoring gave it an Achilles heal which helped to lead to its insolvency. ICSM has consistently warned firms to avoid factoring in most cases as although it can work for some – there are a number of problems often attributed to the practice.

The first one is the one of terms and conditions which are often difficult to understand and are in the favour of the factoring firm. Falling fowl of a clause can cause a breach in the agreement as happened in Brit-Pol’s case. It is important to understand a factoring contract such as what are the monthly minimums, how long the contract is, how much of your funding can come from one customer and what personal guarantees you have to give in the instance of a customer not paying the factoring firm. There are a whole host of clauses in a factoring agreement from the time it takes the factoring company to pay you after they have been paid, to extra fees and interest costs as well the percentage of your cash the factored will hold as a deposit. And most factoring agreements will include the right to refuse to accept an invoice for any reason – usually due to concerns over the financial viability of your client.

The idea of factoirng is simple: the factor firm invoices your clients for your work - and they pay you quicker than you would normally have to wait. And they do the chasing up - but they take a cut. It gives you cash flow - but there's a cost.

If a factoring firm takes as long to pay you as your own clients do – say more than 30 days – then it isn’t worth it as the whole point of factoring is they keep a percentage of the invoice – which is how they make their business - but pay you promptly. One criticism usually made of the system is that factoring could be seen a loan – but for some businesses if the terms suit both parties it can work successfully. Clearly in the case of Brit-Pol something broke down in the agreement.

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For details for the work of the journalist Harry Mottram visit www.harrymottram.co.uk