To Factor or not to Factor

Dear Doc

My manufacturing business on the outskirts of Brisbane is growing very quickly. I have now begun to give customers 30 days credit and they are generally paying on time. However, as I am getting more and more order, I am having trouble with my cashflow.

The products are well received and customer relations ar developing, but I am finding it hard to pay my suppliers on time and some are threatening to stop supplying me until I reduce the debt.

I have been told by some friends in business to look at debtor finance and by others to stay clear as it is the road to deeper debt.

Please explain how debtor finance works, the benefits and disadvantages of factoring.


“Winners can tell you where they are going, what they plan to do along the way, and who will be sharing the adventure with them.” Denis Watley

Factoring has been around for over 40 years and has developed and changed as the needs of businesses have changed over that time. Unfortunately, some people remember that originally it was an expensive way of borrowing that was used almost exclusively by companies in cashflow crises and so had many casualties.

There are two main business situations that benefit from this service. The first is labour hire firms who must pay wages each week but have to wait 40 to 60 days to be paid. The margins are good and therefore it is acceptable to pay between 1 to 4 per cent of each invoice and this is usually added into the cost to the customer anyway.

The second time that debtor finance is useful is in a case like yours, where you are growing at a great rate and whilst you are profitable, you owe more than is in the bank. It is important that you can see quick cahflow is simply to speed up payments and are not just to pay old debts.

Once your sales become stable, you can then reduce your use of the lending company until your cashflow enables you to work with your own cash in bank.

You must however be wary of which company you consider to use and I shall give you a number of tips and questions to ask (which are to help you start, but are not the only ones to consider) before you sign anything!


1        Ensure that the minimum time of contract is no more than 12 months
2        Ensure that after the minimum time there are no penalties or fees to leave the service
3        If there is a minimum fee for the year, check what that means in percentage of turnover and that it is well within your current sales budget for that year.
4        If you are paid COD or know you will be paid within 14 days for any work, include a written agreement that those invoices do not need to be charged.
5        Have at least two factoring companies quoting for your work and let them know who is quoting. Get each quoting company to compare their service with their competitors giving you quotes!


1        What admin charge is made per invoice? This should be between 0.3% and 1% depending on your turnover and spread of clients.
2        How is the interest rate charged? Is it per invoice at a rate per day or a fee for all the monies lent at any time? Also make sure you are not charged on a monthly calendar rate. The different methods of charging, makes a big difference to the final fees and you should crunch your numbers carefully, even if you are anxious for the money!
3        Ask exactly what information they require to buy your invoices. Will they contact your customer for each sale, or only after a certain size of invoice, or randomly?
4        Ask if you can send invoice details and draw funds by internet.
5        If you only have a few customers and a one or two have 30% or more of your business, ask how that will affect your ‘risk’ and ‘spread’ of customers and if it will affect your percentage of drawings.
These tips and questions are not the only ones to get the best service, but you can see the benefits are great if you are growing and need cash injections relating to the sales. However, you must really be careful to choose the best service for your business.

I have found that not all banks or accountants really understand how factoring works. In the accounts the money that comes in is a liability (not an asset) and is treated like a loan, this is reduced when the customer pays for their goods and the money goes to the finance company. So choose a consultant that has worked with a number of factoring services and can help you through the choosing phase and then the paperwork to get started.