Government statistics for 2006 shows there were 4.5m businesses, of which 3.3m were either sole traders or partnerships without employees, meaning that 1.1m firms employ less than 49 people each. This means 4.1m of businesses in the UK are classified as small businesses.
Small businesses often state they have difficulty maintaining a steady cashflow. They often neglect their main asset: the debts owed to them. Entrepreneurs whose vision is in a particular field set up most small businesses. They often do not necessarily encompass all the knowledge required to run a business successfully. They often believe that people will pay their debts without too much chasing. This mistaken belief is one of the main reasons for late payments and cashflow problems. If you don’t ask, you don’t get!
Most small businesses are also unaware of the various legislation that relates to the credit management function. To cope with all this legislation and cashflow management, it may be better to outsource all or part of the credit management function to a professional company. If you then add a finance solution you have factoring.
the recent “credit squeeze” has meant that cashflow has to be obtained from other sources, one of which is now ‘factoring’.
A professional outsourcing company can reduce the value of the outstanding debts. Every debtor day saved could mean a saving of about £219 interest, with a rate of 8% on a turnover of £1m. This saving is a reduction in costs that goes straight to the bottom line to increase profits. The time saved by outsourcing all or part of the credit management function will enable resources to be targeted to the core business that will enable expansion and increase profits.
As the banks are reluctant to provide overdrafts against debts and stock owing to recent judgements in the courts that mean these assets no longer provide the security they require, added to this the recent “credit squeeze” has meant that cashflow has to be obtained from other sources, one of which is now ‘factoring’.
But what is meant by this? Perhaps this can be best described by defining what is a factor? A factor is a ‘person’ that purchases a debt for a discount owed to another, in order to make a profit by collecting it.
If you add a funding facility either to fund your expansion or because you just want to have a facility that is not repayable on demand to the credit management outsourcing then you have factoring also known as invoice finance; a facility that can trace its origins back to Babylonian times.
This is the only facility available to SME businesses that tracks their performance, which helps to reduce the problems of cashflow. Over the last decade this facility has been recognised by Bank of England, the DTI and the Confederation of British Industry and has received their support as a tool for SME businesses.
For more information see www.charterhousefactoring.com
