Factoring in the finance

COMPANIES that rely on bank overdrafts to finance their business could be losing out, according to a report from a division of Barclays Bank.

Factoring - borrowing on the basis of money you are owed - is a cheaper alternative and can also save small businesses the cost of running their own credit-control systems.

Barclays Commercial Services, the factoring division of Barclays Bank, calculates that an overdraft facility will normally cost at least 4 per cent over base rate.

A company with an annual turnover of pounds 500,000 will usually pay 2-3 per cent over base for the factoring of its sales ledger. The cost will be less with a larger turnover. There is an additional charge for debt collection but, says BCS, at 0.75-2.5 per cent, this should be cheaper than staffing and equipping an in-house credit-control operation. One client uses BCS solely for debt collection.

Yet only one in 10 businesses uses debtor financing, compared with one in three relying on an overdraft as main source of finance.

BCS believes factoring is most suitable for companies that are expanding rapidly. As many as one in five businesses may be expanding so fast that working capital is used up, potentially leading to failure, the company warns.

Monkton Hall Colliery, the struggling Scottish pit owned by miners, has factored its debts. The Bank of Scotland subsidiary, Kellock, last month agreed a pounds 400,000 facility, which enabled 80 per cent of invoice value to be paid immediately, rather than the usual six to eight weeks.

Peter Burr, Kellock's general manager for Scotland, said: 'It was appropriate because they were opening up a new coalface, and there would be a dramatic increase in coal output. They had a major supply contract with Scottish Power, who are well-established.

'Miners must be paid weekly, but Scottish Power pay monthly. How do you bridge the gap? They needed extra working capital. Factoring was appropriate. An alternative was an extra addition of equity and they got that, too, for the equipment and infrastructure for the new coalface.'

Mr Burr says factoring can be the most appropriate form of financing for a young business. 'Cash-flow financing services are more flexible than a bank overdraft, because they can be increased as sales increase, and allow a management to have more control over the development of its business.'

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