Unapproved debts and concentration limits

Most factoring and invoice discounting companies operate on a recourse basis, which means that if the customer ceases to trade, the client is required to repurchase the debt. One would have thought that as the factoring company is taking little risk they would not be too restrictive on whom their client sells to, but unfortunately that is not the case and they impose credit limits on the customers with the aim of restricting the funding to the client.

As an example; a client has an Initial Payment against debts of 75% and the debts outstanding total £250,000. This means that the factor is withholding £62,500 and their money is not at risk unless customers with balances totalling over this figure failed to pay.

Why then will they only approve a credit limit of £5,000 on a customer and refuse to fund anything in excess of this if not in an attempt to keep the overall funding level down.

Careful examination of the statistics published by the Association of Factors and Invoice Discounters show the total debts outstanding, and the total payments made against these debts listed by factoring company. Nine members of the Association show payments of under 50% averaged over all of their clients.

It isn’t just the credit limits that cause problems and reduce funding as some factors have stringent invoice verification procedures whereby all invoices above a certain limit have to have their validity confirmed by the customer by fax before the factor will fund them.

This happens even when each invoice assigned to the factoring company is also accompanied by a signed delivery note.

In some cases this is fairly straightforward but you can imagine the likelihood of the accounts department of a large plc confirming the validity and correctness of an invoice within a day or two of the goods having been received in a warehouse in a different part of the country.

Please see next page for details of the factoring solution

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