Factoring solves problem of increasing SME debt

04/08/2008

Factoring and invoice discounting are providing solutions for cash-strapped businesses that are struggling to collect money owed to them in the wake of the credit crunch.

Earlier this year, figures released by automated payment organisation Bacs showed that the value of outstanding money due to SMEs in the UK has increased by £2.6bn year on year. The Bacs figures also showed that the average amount owed to a small business is around £30,000. When compared against the statistic of nearly one third of companies claiming they could go bust if faced with overdue invoices of just £20,000, this is a worrying trend.

Factoring and invoice discounting enable businesses to receive a percentage of their payments immediately, allowing them to pay suppliers and retain working capital.

Nitin Joshi, founder of advisory service ChannelMoney, told What PC: "If a VAR sells to a corporate, factoring would give the VAR 75 per cent upfront instead of waiting for customers to pay them, which usually takes 60 days. Most distributors want to be paid within 30 days, so it helps to bridge the gap. It is up to the distributors to get this right and help resellers to choose the correct deal."

Eddie Pacey, director of credit at Bell Micro, agreed. "While banks have tightened their lending criteria, invoice discounters are more willing to look to the average client and offer 85 per cent of invoice values. However, some are tightening their conditions and reducing this to around 80 per cent of the draw-down value. They are also capping the credit ceiling - this obviously affects the working capital that a lot of resellers have."