Article Changing Factoring
We thought it might be interesting to post a series of articles about the changes that have occured within factoring and invoice discounting over recent years and our predictions about what we expect to change in the future. Whilst we take these changes for granted those that are not so involved with the industry may find this overview a useful orientation. The first addresses Charges and Initial Payments.
Prices, Charges and Fees Have Reduced
In recent years charges and prices generally have been under pressure and service charges have been on a gradual reduction over the last few years. People have seemed more at ease with the concept of changing between factoring and invoice discounting providers as they are with other financial products e.g. personal mortgages. Having said that there is much more interaction with the factoring company than there is with a mortgage provider (the factor will be speaking to your customers!) so it is much more important that there is a good relationship. This willingness to compare and change factors has casued factoring companies generally to become more competitive, which has been a good thing for our clients.
Whilst charges have generally moved downwards, some factoring companies have sought to replace their income through the introduction of various additional charges which can make comparisons more difficult, causing clients to be seduced by attractive headline rates rather than comparing like with like. We have increasingly seen our role becoming that of helping clients make that comparison. In many cases clients also remain largely unaware of exactly what they are being charged focusing only on the headline service charge price.
Very recently, since the advent of the credit crunch, we have seen some providers seeking to increase their prices across the board in order to compensate for increases in bad debts, despite this there are still some very competitive deals available as some providers have seen a competitive advantage in not taking this course of action.
Whilst it is difficult to make predictions, in the near future we expect to see more factoring companies increasing their prices to offset bad debts incurred but in the medium term, when the economy picks up again, we have no doubt that competitive pressure to reduce rates will build up again. Despite this, there are always factors looking to buck the trend, so good deals can still be found if you shop around.
Initial Payments Have Increased
20 years ago initial payments rarely exceeded 80%. Today funding through initial payments (or early payments) of up to 95% are common place and in some sectors 100% is available. Furthermore, with the advent of top up loans and stock finance, in a very few cases, even more than 100% has been raised.
This has been tempered in recent times with the advent of the "credit crunch" and the issues that has brought to the availability of finance. Many of the factoring companies have reigned in the initial payment percentages in order to control their risk exposure.
In the medium term we predict that competitive pressure to build again and for the banks and factoring companies to become more liberal but for the time being we expect the trend of increased control of risk through lowering of initial payment percentages to continue. The good news is that not all factors work in the same way and in a similar way to the approach regarding charges there are factors that are still prepared to break ranks and create a competitive advantage through higher funding levels.
