Q: My business has been chugging along reasonably well, with one continual problem: cash flow. We extend trade credit of about 30 days, but clients will continually stretch out payment beyond this. It’s a continual headache, and I’ve been looking at ways to bring down the number of outstanding debts- which typically run around €40,000 from month-to-month.

One option I’ve considered is invoice discounting or factoring. Doing a bit of Googling on the topic, I see there are large and small operators providing this service. The fees are pretty daunting, and the feedback I read online is mixed. What’s your advice?


A: Invoice discounting is an expensive way to raise finance – getting a loan or overdraft from your bank will, in the long term, be cheaper. Typically, you’ll pay a monthly administration fee, and the normal overdraft interest rate on any finance you have drawn down. While it is useful to many companies, it’s no silver bullet for solving the cash-flow issues that are inevitable if you’re providing trade credit.

If you’re considering this route, it’s important to be aware of the difference between invoice discounting and factoring. With invoice discounting, you manage your own invoicing and collections, drawing down finance against your outstanding debts. Factoring involves selling your debts to the service provider to collect – depending on the company you use, their methods could result in irate clients.

The system is cash-flow beneficial in the first month of the agreement, but only after the administration charges have been taken. In the second and subsequent months, invoices that haven’t been paid will be deducted from the next batch of invoices that you’re seeking finance against. In other words, three months down the line, you’ll likely be dealing with the same cash-flow problems, but also paying money to the finance provider.

In terms of time, the system can sometimes be demanding as well – the company will do an audit of your debtors, for example, as they want to avoid exposure to potentially dodgy clients. Every month, you’ll have reports and reconciliations to do, with a full audit typically once every quarter.

In other words, before you pursue an agreement of this kind, you should first consider whether you’re doing everything possible to chase up your debts and keep cash-flow healthy. If what you’re really looking for is someone to take the collection headache away altogether, that’s very understandable  – in fact, we provide a collections service for many of our clients. To find out more, just contact us and set up a free, no-obligation meeting.


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