Brokers & Factors: The Way Forward
by Colin Bruce, Head of Invoice Finance
Niche Commercial, January 2004
What is the value of adding invoice finance to your broker service? An assessment of the opportunity shows a great deal of opportunity. Basic industry analysis indicates that there are conservatively at least 250,000 UK companies who could utilise the service. Compare this figure to the 35,500 with an invoice finance facility and the room for growth is obvious.
In addition, new banking constraints under the Enterprise Act and impending Brumark complications mean that invoice finance, and specifically invoice discounting, will soon be treated by lenders as more of a run-of-the-mill product instead of as a complex financial solution for fast growers or those in trouble.
To those brokers who are not invoice finance specialists the chances are that the marketing expenditure which has thrown up a potential invoice finance client has already been spent acquiring the client for another product such as leasing or an owner occupier mortgage i.e. it is a sunk cost and, relatively speaking, the margins are very high.
Building a book of invoice finance clients can be very attractive financially. Invoice finance offers a revenue stream which is essentially annuity based i.e. compared to mortgage and leasing business, invoice finance offers a predictable stream of monthly revenue to be added to your balance sheet, mitigating cash flow dips in slower months. Depending upon the volume of business you pass to a specific company, a broker might receive up to 1% of his client's turnover in commission. Although invoice finance is an unregulated industry, allowing the broker a certain freedom, this fact should not be abused.
And what is the benefit to the factors? To the bank-owned factors the benefit of increased broker activity to direct business is small. Increased broker activity enhances the transparency of the market meaning those banks who price opportunistically may be at a disadvantage but as a vast majority of bank-factor leads originate from internal referrals, their deal flow is insulated. However to the other independent 90% of the market the benefit is huge. Ultimately it's the banks that usually fund the independent factors and underwrite secondary business anyway!
Most independent factors rely on introducers for a vast majority of their business. And increased deal flow from their primary source of business is greatly welcomed. An important responsibility exists for the factoring market to tap into the great broker pool to educate and reward cooperation. Some factors have been more aggressive than others in this area, with Potential Finance and Alex Lawrie being at the forefront in the recent Business Finance Expo.
So, how can brokers generate business? Of all the businesses for whom you have performed broker work as your business clients, roughly 1 in 7 are likely to be suitable for invoice finance. However it is likely that only 1 in 50 currently uses the service. Can you spot the opportunity and can you sell the benefits of the product? Choose an independent factoring company at random and the chances are they will welcome your call, take you for lunch and provide some coaching. If lunch doesn't appeal then here are the basics:
- Invoices must be raised after the work has been performed
- Only invoices raised to other companies will be considered
- Debt structure must be relatively simple i.e. proof of debt must be clear
- Check for "ban on assignment" in debtor contracts
- A minimum turnover guide is £50,000 per annum
While a significant portion of the invoice finance business written is "vanilla", knowledgeable placement of a client is key to achieving good conversion rates. The potential revenue streams from this product are such that all brokers should consider strategic partnerships with specialist brokers such as Factoring UK and/or seek to license an electronic broking platform such as the Xbridge marketplace.
Some basic ground rules for both parties to follow to realise the full value:
- Brokers must add sufficient value to the proceedings. Identification of opportunity, assessment of the opportunity and sensible placement are a must. Passing a phone number and first name to the last sales manager who took you for a game of golf does not meet the level of professionalism required.
- Factors, in turn, must give clear feedback and ongoing guidance to the broker. Closing a piece of business can frequently be performed many times faster when there are two of you helping the proceedings, rather than just the sales manager working alone.
- Factors should utilise consistent standardised commission agreements where possible. For any broker who has worked in this industry for any period of time, being responsible for a significant volume on a factor's book, the most aggravating experience is discovering the same factor offering identical commission rates to a broker with whom they have no track record. Structured and tiered commission schemes are a responsibility factors owe to brokers.
The opportunity for both brokers and factors is clear. There is an infrastructure capable of handling many times the current volume. Furthermore a potentially large channel to market is grossly under exploited. Brokers hold the key to unlock the latent business with their respective contact bases and clients and 2004 should be the year to start unlocking this value and revenue.