Factor that reduces the export risk

THE DECLINE in export orders and deliveries over the four months to mid-October, reported by the CBI, will come as no surprise to small firms that have abandoned attempts to break into overseas markets because of the devastating effects on cash flow.

Trying to persuade recalcitrant customers in the UK to pay up is hard enough; but it cannot compare with the tribulations when the customer is thousands of miles away, with no common language.

One way to avoid late payment is to factor debts. As export sales have declined, the proportion factored has increased - by just over a third in the third quarter of this year against the same period last year. Factored export sales for the first nine months of 1993 totalled pounds 302m.

Factors pay up to 80 per cent of the invoice value when the exporter ships the goods, and the remainder when the customer settles up. They charge a fee of between 0.5 and 2.5 per cent of the value of the invoice, plus interest of about 3 per cent above base rate on the advance payment.

The Association of British Factors and Discounters has just issued the following guidelines to help inexperienced exporters: consider taking out a credit insurance; package costs attractively (many importers prefer all-in prices, including door-to-door freight); consider dealing in the customer's currency and hedging against exchange fluctuations; negotiate a favourable method of payment and make sure it is included in the purchase order; protect against delivery delays by agreeing credit terms of, say, 30 days from the date of shipment.

Business people tend to feel when they've made a sale they're home and dry, said Ben Allen, chairman of the ABFD and managing director of Kellock, the factoring arm of the Bank of Scotland. 'They send the goods and invoice out and expect to get paid in sterling, in 30 to 60 days - but that's not what it's like.'

Fantasy Gifts, of Hebburn, Tyne and Wear, has been factoring its debts with International Factors for 18 months.

The company sends ships in bottles around the world, exporting about 80 per cent of its output, of which 90 per cent is factored. It sells to the United States, Europe, Japan, Australia, the Middle and Far East and to some countries with newly developing economies.

Anthony Robinson, the company's financial controller, who describes himself as one of the last shipbuilders on the Tyne, employs 110 people to produce these little ships, which are crafted for specific markets. He has exported Arabian dhows to the Gulf states and the flagship USS Constitution and the Mayflower to the US.

'Before we factored, we had to do our own documentation and arrange collection of debts, which was sometimes a problem,' Mr Robinson said. 'There were language barriers, when no one in the customer's accounts department could speak English; and often you knew a particular customer could speak English but he would say he couldn't understand, which was a delaying factor. Factoring has enabled us to free funds that would have been tied up for anything from 30 to 120 days. That's allowed the company to grow. It has also allowed us to pursue business in the Far East and South America.' He said that since the factor only factored debts that could be insured, it could be expensive to obtain a letter of credit when the company could not obtain cover and the customer would not pay in advance.

'We had a few teething problems setting up the system, and it took probably 200 to 300 hours of my time. But it's been worth it; it saved a lot of administrative time in the long run. We now have three times as many customers abroad as 18 months ago, and an export turnover of about pounds 2m per annum.'

Keith Shelbourne, managing director of Shelbourne Reynolds, a manufacturer of specialist harvesting machinery, had other reasons for factoring. 'We have a factory that needs to turn out machinery 52 weeks a year, so we need people to buy equipment when they don't need it,' he said.

His company, based at Stanton in Suffolk, exports 80 per cent of output, and has its main markets in the US, Central and South America, followed by Australia and Europe. Eighty per cent of the export debt is factored.

'Before we factored, we had a choice of giving discounts or extended terms. To make it worth people's while to buy out of season, we would have to give 10 to 15 per cent discount; and for a company such as ours, to give extended terms of 160 to 180 days would put an enormous strain on cash flow.

'By factoring the debt, we're able to charge people ordering out of season the normal price, but with six months' credit.

'The great thing is, this has enabled us to increase turnover and expand our export trade, by giving our customers long enough terms to keep the factory running reasonably evenly all year, and keep the cash flow healthy.

'If I asked the bank to lend me half my annual turnover, they wouldn't agree. When I think of the hoops you have to jump through to borrow a few hundred thousand . . . This way we can have millions outstanding,' Mr Shelbourne said.

It is important to check the details carefully before making an agreement with a factor. One company that assumed its factor would handle all its insured business discovered, after making sales on terms of 365 days, that the factor would not advance the money. In fact, 180 days would probably be considered the longest period for short-term debt of this kind. Without insurance cover, factors may be willing to try to collect the debt, but it is highly unlikely that they would advance a payment.

(Photograph omitted)