Concentration limits are often ignored until funding is restricted and at this stage it is often too late.<\/p>\n
A concentration limit indicates how much of a debtor book a lender will allow with a single debtor. When I say allow I mean how much they will consider eligible for funding.<\/p>\n
Let’s look at an example. Mr G Raffe Ltd set up a facility with one of our friends at a major high street bank. He is a new start company selling widgets which the high street bank are delighted about as it is a favoured sector for the factoring industry. They have offered him an 80% prepayment and Mr G Raffe is delighted. He noticed a 30% concentration limit in his agreement but didn’t want to ask what it was and as it was so well hidden in the agreement he decided to ignore it.<\/p>\n
Not long after opening for business he receives and order for \u00a3100,00 including VAT from a large reputable supermarket chain. He is delighted. He delivers the widgets as agreed, gets a signed proof of delivery and raises and invoice. He places this on the banks system and looks forward to having \u00a380,000 available the next day (80% x \u00a3100,000). It will be useful to pay wages and his supplier.<\/p>\n
The next day he logs into the system. He can see the \u00a3100,000 that he has uploaded but the available balance is only \u00a324,000. This can’t be right surely.<\/p>\n
As the bank have a 30% concentration cap they will only consider 30% of this debt as eligible. As such they view the eligible ledger as \u00a330,000 and then apply the 80% prepayment.<\/p>\n
The effective prepayment is only 24%!!!!<\/p>\n
Not all lenders impose a concentration limit and are happy to finance against a single debtor. Had Mr G Raffe set up a properly structured facility for his business he would have been able to access more than 3 times the amount of cash that the bank was offering him.<\/p>\n
Concentration limits are very important when considering a factoring facility. For some businesses they have no impact whatsoever on their funding but for some businesses it can be catostrophic.<\/p>\n
It is important you consider how the structure of a facility can impact on your funding. This needs to be done when setting up the facility and before you sign up for a lengthy contract.<\/p>\n
In the first instance why not contact Smart Factoring Quotes on 0845 863 0738<\/p>\n","protected":false},"excerpt":{"rendered":"
Concentration limits are often ignored until funding is restricted and at this stage it is often too late. A concentration limit indicates how much of a debtor book a lender will allow with a single debtor. When I say allow … Continue reading