Factoring problems with credit limits

Recourse factoring is where all debts are at the company’s own risk in the event of customer failure.

One would have thought that as the finance company is taking little risk they would not be so restrictive on whom their client sells to, but unfortunately that is not the case and frequently they impose credit limits and concentration limits on their clients’ customers with the sole aim of restricting the funding.

As an example; a company with a turnover of £1.5m and total debts outstanding of £250,000 may possibly have a blanket individual customer limit of £20,000 with the factoring company refusing to fund any balance in excess of this figure irrespective of whether they are taking the credit risk or not.

Some invoice finance companies can be even more miserly than that as we were approached by a company turning over £2m per annum where the bank owned factor was refusing to fund any account in excess of £5,000 until they had at least two months’ trading experience with that customer, irrespective of their creditworthiness.

Factoring company reducing funding

Our most recent experience is with a small manufacturing company who despite being offered a facility of 80% of invoices from one of the major independents found that once the ink on the agreement was dry the factor was restricting the funding on his major customer to £20,000 despite the average balance being in excess of £30,000 and the customer itself being a £50m turnover concern.

At least in those cases where the factoring company is assuming the credit risk in the event of a bad debt loss one can understand their cautious approach to setting credit limits but unfortunately in many cases the client loses out even worse as the factor has more reason to set restrictive credit limits.

The statistics published by the factors’ trade body show the total debts outstanding, and the total payments made against these debts listed by factoring company. Careful examination of these figures indicate that too many members of the Association show payments of under 50% averaged over all of their clients

If you are suffering from bad factoring recourse problems contact our friendly and expert team on 01827 707680.