The role of the invoice finance broker

22/7/2009

Les Gordon, Director of LC Factoring Advisory Service, provides his thoughts on the relationship between broker, factor & client.

How do you work alongside other professionals such as accountants?

We find an increasing level of business coming from accountants these days for a number of reasons -

• Firstly, accountants generally have a client base which requires constant attention, and they find they have little time to deal with a factoring enquiry on behalf of a client. The market has also changed and it is no longer the situation where it is simply a matter of phoning a couple of factors to place a deal.
• Secondly, the Factoring Advisory Service does not take commission, so we can place a deal for an accountant and if they choose to, they or any other introducer can keep the commission.
• It is also the case that in a recession costs such as factoring are being closely scrutinised by accountants to see if there is any room for improvement and cost saving. We have the experience to be able to assist and have been able to save accountancy clients money on their factoring costs.

So, what's in it for you ?

The Leonard Curtis business model is based on long term working relationships with the professional community.  We are able to refer work to asset based lenders, accountants, banks and solicitors, in return for which we obtain reciprocal instructions from them.

How significant is the role of the broker in the factor-client relationship?

Brokers are important because they are the ‘eyes and ears' in the marketplace. The prospect/client may know what factoring is, but not know who to go to, or where the best deals are. A broker will be able to advise of the best rates and match the right factor to the right client.  Finding the right funding partner has rarely been more important during a recession where the lending market has changed significantly.

What parameters do you apply when matching clients with factors?

The main parameters that determine which clients should be matched with which factors are -

• Turnover - some factors specialise at the smaller end of the market and offer a good personalised service, whilst others are more suited to larger invoice discounting deals.
• Market sector - some factors are geared to handling clients from a particular sector such as recruitment or construction. There are other factors who offer additional services such as payroll or trade finance to clients.
• Geography - some clients like to deal with a locally based factor whereby they feel they can talk to or meet their client manager more easily. There are also some companies who do a lot of business with foreign customers and need a factor who can understand and collect foreign debt.
• Product - there are a wide variety of factoring products available and not all factors offer the same range of products.

With rising risk and fraud an inherent part of the current crisis, is matching clients and factors becoming more risky?

It is not becoming more risky to match a client with the right factor but there is undoubtedly a much greater awareness of the potential for fraud amongst lenders.  Lenders now more than ever have to consider -

• What the implications will be if client goes bust?
• Can the debt be insured?
• The quality of the debt.

Risk is more prevalent in a recession.  A company may think that it is an easy option, for example, to pre-invoice for work that hasn't yet been completed or an order that hasn't been delivered; or to ‘fresh-air invoice' ie. make up an invoice against a client to raise some cash and then write off the invoice.

How have the requirements of clients developed in the downturn?

In the downturn, it is even more important for the client's expectations to be managed.  Factor's rates are increasing because they are seeking to manage risk and get a better return on investment, but clients want a cheaper service because factoring is an expensive overhead.  Therefore, brokers need to manage the expectations of the clients to make sure that they get a fair deal for what they are paying.

What broker USPs have been consistently attractive to clients?

The database of contacts is attractive to clients.  In a static market, brokers are less important, but in a volatile lending market, brokers are called upon to ensure that the client is getting the best deal available.  Also, brokers are able to assess what is out there in terms of funding - they can see who is lending, who is increasing rates and who is still actively looking for new business.

How can factors best develop their relationship with their broker?  

Communication: There are lots of assumptions made about the product offering of a factor, but it is important for brokers to keep up-to-date with the market in terms of costs, rates, charges etc. to ensure that they can competently recommend the best and safest factor for clients.  Brokers need to be able to let clients know what is out there in order to match the right client to the right factor.

And how can brokers and factors co-operate to maximise the number of clients coming through their door?

Any client that cannot or will not be taken on by a factor should have their enquiry referred back to the brokers who will be able to find someone to help them.   Also a quick "no" to a proposal is often better than a drawn out "maybe".  Factors should know fairly quickly if the deal is for them, and if it is not the broker can then try to place the deal elsewhere before the momentum is lost.

How has the brokering industry fared of late? Have there been casualties?

Everyone has to work harder in a recession as lenders are more risk averse, and it is taking longer for brokers to find funders and secure the deals. Therefore, commissions have slowed as it takes significantly longer to conclude a deal.  As in most industries during a recession there will be some casualties, but LC Factoring Advisory Service is unique because it does not take commission, therefore will not be hit by an increase in the time it takes to conclude a deal.

How long do you believe rising risk will continue to impact upon the factor-client relationship?

The recession has shed some light on some basic questions that may have been overlooked in a time when the market was in boom.

These are questions that I believe will continue to be studied closely before any deal is sealed in the future, such as -

• The quality of the debtors.
• The ability to collect any outstanding payments.
• The credibility of the clients, decent balance sheet, ability to pay, strength of the paper trail.

Previously, when the level of risk was lower, these criteria may have become a bit blurred, and a factor may have been willing to accept say background security such as the value of a directors house as justification for doing a deal.

In conclusion, there are still plenty of lenders willing to lend and brokers able to assist in facilitating the deal.

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