Key factor to make your firm blossom

But the days of ‘rubber cheques’ are behind Nico Van Duijn, thanks to a factoring facility suggested by his business banking manager.

Van Duijn, who set up his wholesale flower business, Floral World, in 2001, initially dipped into his own pocket to tide the business over between paying his suppliers and his customers paying him.

Last year, however, a chat with his Royal Bank of Scotland business manager highlighted a solution in the form of the bank’s factoring service.

Factoring eases cash flow peaks and troughs because as soon as an invoice is raised the factoring agent (in this case RBS) will advance the bulk of the amount of that invoice to their business customer and the remainder is handed over, less fees, when the business’s customer pays up.

RBS charges 2-2.5% of the invoice value for providing the service and deducts an interest charge of base plus 2.5-3% for the money it advances before the invoice is paid.

Van Duijn, said: "I get 80% straight away. It has given me a lot of space to go to new customers because I have the security of the bank behind me."

However according to Niall Stuart, deputy parliamentary officer for the Federation of Small Businesses in Scotland, Van Duijn is in the minority.

Only 3% of FSB members in Scotland use a factoring agent to help with their cash flow. UK-wide the situation is little better, at just 4% factoring.

While not every business will be suitable for factoring - contractors whose part payments are conditional on the completion of an entire project would be unlikely to be allowed to factor - most businesses with an annual turnover of 20,000 could avail themselves of such a facility.

RBS says factoring can also act as an alternative to personal guarantees. The latter are traditionally used by small business owners as surety against an overdraft facility. However, not every business owner is able to risk the family home or other personal assets in order to secure working capital for their growing business.

Lloyds TSB also offers an invoice factoring service to its small business customers as part of its asset-based lending package.

Typically, this will see up to 90% of an invoice’s face value being advanced to a business customer within 24 hours of it being raised.

Paul McMahon and Nathan Siekierski, joint managing directors of Digbeth-based Jasper’s Corporate Catering, were nominated for the Shell Livewire Young Entrepreneur of the Year Award in 2003.

They have been using the factoring facility available through Lloyds TSB’s Commercial Finance.

Siekierski, said: "The factoring facility made available to us by Commercial Finance helped the business during the early stages by guaranteeing cash was available for us to reinvest in the company," said Nathan.

"As a small company it was also good for us not to have to worry about credit management and chasing payment from customers as this was handled through Commercial Finance, meaning we could concentrate on other areas of the business." It is even possible to protect against an invoice not being paid, with non-recourse factoring, which includes bad debt protection.

However, Van Duijn has not had problems with non-payment. He says his customers know he has the full legal weight of RBS behind him.