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Invoice Finance - Facts

Invoice Finance can dramatically improve cash flow by releasing money as early in the process as possible after an order has been completed and because the facility is linked to sales it is ideal for funding growth by providing immediate working capital.

What is Factoring?

• The key elements of a factoring facility are that the Invoice Finance Company (the factor) fully manages your sales ledger and provides you with credit control and collection services for all of your outstanding debts.
• Advances can be as high as 100% (although 80/90% is more typical) of outstanding invoices which can be funded for anything up to 90/120 days dependant upon the credit terms already agreed between you and your customers.
• Factoring is usually a “disclosed” facility in that your customers are aware of the factors involvement. It is a very flexible product and there are a number of hybrids giving you a degree of choice as to how much involvement you wish to retain over credit control. You also have the option of adding bad debt protection (known as non-recourse factoring) for all or just some of your customers which can be very cost effective as well as offering peace of mind.
• Our experts will be happy to give advice as to what options might suit you and your business best.

How does Factoring work?

• The invoice you issue upon delivery of goods/ a service is assigned to the factoring company through inclusion of the factors standard wording on your invoice.
• The original is sent to your customer in the normal manner and a copy is sent to the factor as notification. The copy invoice will be entered into your client account within the factors sales ledger. In practice, most factors operate an on-line system cutting down on paper-work and making the whole process both stream-lined and straight-forward.
• On acceptance of the invoice, the factor will make available the pre-agreed advance, usually 80 / 90% less charges, of the invoice amount to you. The balance is made available to you when your customer makes payment directly to the factor.
• In the interim, dependant upon the type of agreement you have chosen, the factor will be responsible for sending regular statements to your customer and for collecting payment for the invoice when it falls due.
• Funds are usually released to you within 24 hours of issuing the invoice.

The costs of Invoice Finance

• There is a misconception that Invoice Finance is very expensive. This is often not the case and indeed Invoice Discounting facilities for larger companies are often cheaper than overdrafts. Once time freed up from managing the sales ledger and the benefits to the bottom line in increased sales through improved funding are taken into account, Invoice Finance can easily justify itself in cost terms.
• There are two main costs involved. The service charge is expressed as a percentage of sales factored and is determined by the turnover of the business, the number of invoices raised and the number of customers you trade with. It will typically range between 0.5% and 2.5% of gross turnover, subject to an agreed minimum monthly or annual charge.
• The discount (or interest) charge is calculated against the funds you borrow, in much the same way as an overdraft, and the rate payable is comparable to normal secured bank lending rates-quite attractive given the factor generally has no additional security other than the debtors.
• Credit protection will typically cost from 0.3% to 0.6% of your gross turnover to cover all of your customers, a little more to cover individual customers. In the event a credit approved customer fails to pay a non disputed debt, the insurance will typically pay up to 95% of the approved credit limit.

Invoice Discounting

• Similar to Factoring but leaves responsibility for your sales ledger, credit control and credit collection with you. It is usually a “Confidential” facility i.e. its existence is not known to your customers.
• As the Invoice Finance Company has no day to day control over your invoices (i.e. it’s security) , Invoice Discounting is generally, but not exclusively, offered to companies which are well established and have good administrative and financial systems.
• With less work for the lender, this type of facility is usually less expensive and for larger businesses (£5m+ turnover) is amongst the cheapest forms of funding available.
• Service charges typically range from 0.15% to 0.5%, subject to an annual minimum fee of £5/6000, dependant upon turnover whilst the interest charge will range from 1.75% to 2.5% above bank base rate dependant upon the strength of your business and the amount you are likely to be borrowing.

Other features of Invoice Finance

• Invoice Finance facilities are available to most types of business issuing invoices for completed work on credit terms to other businesses. There are a few exclusions such as businesses selling to the public and areas such as construction where staged invoices are the norm are more difficult but we understand this market well so please ask!
• Turnover from £50k upwards – invoice finance has grown massively as a source of funding for businesses of all sizes in recent years and is now very much mainstream.
• Ideal for start-ups when raising finance can be difficult and sits well alongside other facilities such as the Small Firms Loan Guarantee Scheme, Trade and Asset Finance. Is often a key funding component in company acquisitions, management buy-outs/ins and re-financing packages.
• Export debt – several Invoice Finance Companies offer the ability to fund export invoices and offer credit insurance to protect these debts.

There are some crucial points to be considered before entering into an invoice contract including the choice of the right factor for your business-they are by no means all the same-, understanding at the outset the reasons why your funding might be restricted, the exact nature of the agreement you have signed and what happens if you decide to terminate it.

Our experts understand all of these issues, will explain them to you and with more than 50 providers to choose from, ensure you get the right deal for your business.

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