Is managing cash flow one of your biggest challenges? Do you have sleepless nights over meeting all your outgoings? Perry Burns joins us to show you how to release cash tied up in invoices and get money owed by debtors into your business faster.
Managing Cash Flow
Managing cash flow is how Perry Burns helps the world. He is the Managing Director of Working Capital Partners in London. He works with small businesses where they are under pressure with cash flow. They are able to help them to release cash tied up in invoices, help them to pay suppliers on time and get them to a situation where they aren’t worrying about paying the next bill or how they are going to grow their business.
Businesses dont go bust because they are not making profit. The main reason why businesses go bust is that they run out of cash.
How Working Capital Partners Helps with Cash Flow
The two most common ways are:
- How much are you owed by your debtors? WCP look at their debtors ledger, checking the credit rating of those debtors, then effectively buying that ledger from them. As much or as little as they need. This gives them immediate cash.
- If there isn’t a debtors ledger or the debtors ledger is poor, that’s where they focus on paying suppliers. This relieves the need for cash to pay suppliers.This is particularly helpful with younger businesses where suppliers are reluctant to grant credit terms. This intervention helps cycle their business quicker than they would otherwise be able.
What’s the Cost of Factoring a Supplier’s or Creditor’s Invoice?
That’s probably the most common question WCP get asked. (Well done Kevin!)
There isn’t a simple answer. It depends on what percentage of invoice that is financed and how long the debt is outstanding. But most clients pay between 2 and 5% of the invoice value.
This is not the cheapest form of finance. However, it is one of the most convenient. And certainly one of the quickest to set up.
If your business is working on a reasonable gross margin, the fee can be built into the deal. Most of WCP’s clients will discount immediate payment of 2-3%, or alternatively you can have your credit terms at 30-45 days whatever, and the price will be whatever it will be. Covering the WCP fee and they still get paid straightaway because they tae the invoice directly to WCP.
How do People React to 2 Tier Pricing Like This?
According to UK Finance https://www.ukfinance.org.uk something like £64 billion of UK debt is factored every year. Most debtors are very used to the idea that there will be a Factor involved and who will be intermediating the finance.
It is a very common way of financing deals.
Especially for larger companies. In some countries in Europe, 90% of deals are factored. Spain, Italy, nearly all deals are factored.
How Does Factoring Work?
When the invoice is raised, there is an Assignment notice put on the invoice. This can be done through Sage or Quickbooks or whatever.
The assignment notice says this debt has been assigned, to Working Capital Partners Limited, and please pay this bank account. It’s a simple as that. WCP call the customer’s accounts payable department to make sure they have got that assignment, they then pay into WCP’s trust account. Once settled, WCP deduct their fee and send the money on to their client.
Are Assignment Invoices Paid More Quickly?
Do they just behave normally…stretching credit terms, or do they behave differently? When customers know that a Factor is involved, they TEND to pay WCP quicker than they would pay the client directly. The reason is they know that WCP know what they are doing. And they will be more aggressive in collecting that debt than a normal supplier.
They also know that WCP credit insure the debt. If they start paying late WCP will report it to there credit insurers and that will affect their credit insurance profile.
There is a kind of hidden advantage. You get paid quicker and that means you pay less to WCP in terms of fees.
Is Factoring an Outsourced Credit Control Department?
Is the fee just a replacement of the cost of maintaining a credit control department? Some customers like to do their own. They have worked extremely hard to build up a relationship with their customers, and they don’t want a third party involved in collecting that debt.
Other clients just want to get on with what they do best. They don’t like the credit collection bit. So they are quite happy to outsource that to WCP. They call their clients, conscious that the relationship between client and their customer is key. However, the debtor knows they are being called by a third party and they tend to respond to WCP in a more timely way than they might otherwise.
They also know that WCO has heard all the excuses!
This is a good way to keep a check on cash flow.
Is Factoring Right For Everybody?
There will be occasions where the debt is not factorable. The most obvious is where there isn’t a tangible or measurable deliverable. You can only factor debt if there is clearly an undoubted delivery of a good or service.
Similarly, if there are things like RIGHTS OF OFFSET. Or inter-trading between the companies, that can damage the ability to factor debt.
Example: Construction Industry – a “rather pernicious little clause” – that you get in purchase order contracts called Ban on Assignment. Such ban statements say, notwithstanding the fact that you are entitled to factor your debt under Section 136, of the Law of Property Act 1925 http://www.legislation.gov.uk/ukpga/Geo5/15-16/20/section/136 if the contract says you can’t, then you can’t.
There are moves afoot to set aside this one-sided clause. Watch out for The Small Business Enterprise & Employment Act 2015. http://www.legislation.gov.uk/ukpga/2015/26/contents/enacted This legislation should make those clauses illegal. City lawyers opposed the regulations underpinning this legislation and they were withdrawn. The main beneficiaries from stopping the ban on assignment clauses are businesses in the construction industry.
One of the biggest opponents to the ban on assignment clauses was Carillion!
Was Carillion Debt Assigned?
Factoring is an interesting technical term. What factoring technically means is the debt is disclosed to the debtor. So, there is an assignment notice placed on the invoice. It says this debt has been assigned.
There is another way of doing it.It is called Confidential Invoice Discounting.
What that means is that the assignment is NOT disclosed. The Factor is working behind the scenes. So, anyone who had a Confidential Invoice Discounting arrangement with Carillion debt almost certainly will have been insured by their discounter. WCP has a hybrid arrangement.
If a client is trying to set up factoring, they can go to the client and ask them to agree on this occasion that it can be factored. In about 30-40% of cases, customers will agree.
The Government Response to Carillion?
In the days immediately following Carillion’s collapse, Government spokespeople were saying it was in the hands of the Official Receiver and it is nothing to do with us. However, they knew that the company had to go into liquidation, rather than administration, is because they didn’t have enough money to cover administrator costs. They didn’t have enough cash. Back to cash flow again.
The Government knew perfectly well there was no cash. Anyone who was not insured, or who was not involved in a Government contract, wouldn’t get paid.
It is tragic. The Government was very misleading in how it represented the plight, particularly small businesses in the supply chain would find themselves.
WCP pulled cover on Carillion well over a year ago. Slow payment terms were being highlighted by the credit reference agencies. This was a problem well known beforehand.
ADVICE: Before you accept a new contract, always go and check the credits. There are some free services, where you can get a high level view of what a business looks like, but won’t give you an in-depth view. If you have the budget, take out credit insurance yourself. When you present the contractor, like Carillion for example, to the credit insurer. If they say no. Then you must think carefully about accepting the contract, at least on the terms offered.
No credit insurance? Negotiate better payment terms. Downpayments, shorter length of credit.
What Can You Do To Improve Cash Flow, Without Borrowing?
Click the banner and you can download advice on the steps you can take to improve cask flow. Number 8 on the list is factoring.
The most effective piece of advice is GET YOUR INVOICES OUT ON TIME. The number of people who WCP come across, who routinely wait 3 or 4 weeks after a job has finished before they raise their invoice, is astonishing.
Cut 30 days off your cash flow! Raise your invoices on time.
SEND STATEMENTS. Your accounting packages can raise statements for you. There is also no cost, as your statements are emailed. The software will also send out reminder letters.
These kind of steps are easy, cheap, quick. But they can have a huge effect.
These tools are there to streamline how businesses operate. We live in an age where there is an expectation that your business can effectively deliver administration.
If You Are Short of Cash, What Can You Do?
Its the bugbear for many businesses. Don’t spend things on stuff you don’t need. Prioritise your spending.
Perry’s example. Client had 80% margins, but was cash poor. Reason? He’d purchase debenture tickets for the Emirates (Arsenal) and at Wembley for client entertaining. For customer entertaining!
Go through your payments regularly. Has your business need lessened and gone away. All of us will be guilty.
What is the state of your business? Contracting or Growing? Growth leads to pressures on the business. If you are growing watch your cash flow very carefully. If the business is contracting, watch the business, but for a different reason.
Example: Young start-up. He’d obtained an order from a shopping channel. They placed an enormous order. Perry pointed him to the sale or return clause. 1,000 pieces, retail £400, cost £100 each. He was about to spend a lot of money. If they didn’t sell, he would have a huge debt. Perry advised a different contract.
How do People Find Responsible Lenders?
The industry body is UK Finance. https://www.ukfinance.org.uk
If someone has a UK Finance logo on their website, by definition, they are a responsible lender.
Different lenders specialise in different things. Don’t ask WCP for a mortgage. They don’t do them. Similarly, no point in going to a mortgage company is you want cash flow finance.
UKF has worked closely with Government regarding Carillion. WCP has been working with UKF on behalf of their clients involved in the Carillion collapse.
We are where we are. What do we do? Don’t panic. There will be a solution. It’ll be better than we think. It’s about getting ready for the future now.
Example: What will happen to EU subsidies to Farmers? Our Government has said you will not get subsidies in the same way. We will no longer be dependent on the Common Agricultural Policy, driven by French Farmers. Instead they’ll pay Farmers for ‘public goods’. Footpaths, amenities. Therefore Farmers may need to plant a wood, improve footpaths. That requires investment.
What happens if you don’t have money to invest?
The Brexit Finance Company specialises in Brexit related projects. It could be for an agricultural project to improve the land as a public good. Exporters may require investment to fund trips to different parts of the world. Flights, hotels, meetings, dinners etc.
Now, there are special finance facilities for exactly these businesses.
By the time 2019 comes around you need to be ready for new open doors.
An outstanding idea. Supportive of our UK future.
How did the idea come to you? Perry and his wife were celebrating their 40th wedding anniversary in India. He saw the enormity of India. He asked how would you take advantage? Someone needs to be able to help smaller businesses. How to find agents in New Delhi. The Brexit Finance Company has wholesale finance backers. His doors are open now.
They are investing in getting the resources ready for this. Their funders really like Brexit Funding, including Mission Critical Funding. Like Landlords who from April needing an energy efficiency rating of E or better. That means, without it, you need to upgrade.
The Next 100 Days
- Get your invoices out on time.
- Check your client’s credit rating. Our listeners can call Perry to request a credit rating!
- Look at credit insurance. Some big risks are appearing in the retail industry. Take a new look and make sure your house is in order.
Contact Working Capital Partners
Telephone: 020 8203 6500 and mention the podcast
he Next 100 Days Podcast is brought to you by Graham Arrowsmith and Kevin Appleby