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Stories Tagged ‘Single Debtor’

Construction factoring is a topic that we have covered several times on this forum.

It is a sector that struggles to find suitable forms of working capital finance as banks are reluctant to offer overdraft facilities and invoice finance companies are uncomfortable with the risks associated with the construction industry.

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Selective factoring was recently set up by Smart Factoring Quotes for a security company based just outside Chester in the North West of England. They had landed a large contract worth over £400,000 over 3 months. They had to invoice monthly on 90 day terms and yet they were paying their security staff weekly.

They approached with a view to spot factoring the 3 individual invoices. We looked at their options and found that selective factoring was by far and away a cheaper option. Selective factoring means that you factor all the invoices of a particular debtor whereas spot factoring means you can pick and choose individual invoices. The difference in this instance is subtle but the difference in cost was dramatic.

Selective factoring worked out almost 10 times cheaper in this instance. The facility will allow our client to take on a lucrative contract and meet it’s weekly wage demands. Profits will be increased because of the selective factoring facility.

If you take out an invoice finance facility and the prepayment is 80% you may well think that you will receive 80% of the total ledger. In theory that should be the case if the facility is set up properly. The key is to understand what your eligible debt is. Let’s look at areas that could reduce your eligible debt:

Concentration Limits – I have already touched on this in a previous post about concentration limits so will not go into too much detail. However, any debt that falls outside the concentration limit will not be eligible for funding and as such can reduce the eligible debt dramatically.

Recourse Period – If you have a recourse period of 90 days any debt that is over 90 days old will not be eligible for funding. If you have a £100,000 ledger but £20,000 is over 90 days old then the eligible ledger is only £80,000. This is what the prepayment level will be applied to.

Debtor limits – If you have 10 debtors of £10,000 you will have a ledger of £100,000. If you had an individual limit of £5,000 for each of those debtors the total eligible debt would only be £50,000 and with an 80% prepayment applied this would generate funding of £40,000. By trading over agreed credit limits you will in effect reduce the actual prepayment level.

It is imperative you set up a factoring facility that can accommodate the unique features of your own ledger. Ensure that the debtor limits and concentration limits are what your require. Shop around! Also ensure that you understand the recourse period and the effects it has on your funding and costs. Work hard to ensure debts are collected within the recourse period.

A concentration limit indicates how much debt an invoice finance funder will allow with a single debtor. By way of an example if your concentration limit is 30% and your total ledger is £100,000 then the lender will only consider £30,000 of funding with any single debtor. Supposing you had £50,000 of debt with your largest debtor then only £30,000 would be considered as eligible debt. This would reduce the total eligible debt to £80,000 so if your prepayment was 85% the funding generated would be £68,000.

It is important to understand the impact of a concentration limit on your funding. In the example above although you as a business have an 85% prepayment level the impact of the concentration limit has reduced the actual prepayment level to just 68%.

Concentration limits will not be an issue for many businesses who have a good spread of customers. However, if you feel that one customer could account for 20% of the money owed to you at any one time it is important to consider the concentration limit. Some lenders impose a rigid 20% concentration limit while others will offer a concentration limit as high as 100% meaning they will finance a single debtor. Be honest with yourself and try to envisage what may happen in the future.

Single Debtor Factoring

Single Debtor Factoring can be hard to obtain – especially with any meaningful prepayment level.

There are only a number of invoice finance lenders who will consider a proposal where a client has only one customer. This number reduces dramatically as the required finance limit increases.

There is an argument that lenders should be willing to provide funding against a good quality single debtor such as Tesco and as stated some lenders are more than happy to do so. It does however increase the risk profile and typically they will need the debt credit insured. A major concern relates to disputes – the debtors willingness to pay rather than their ability to pay.

Lenders will often call this type of proposal 100% concentration

Smart factoring Quotes recently received an inquiry from a client looking for finance of £800,000 against a single debtor.

We were able to do a quick review of the market and establish which lenders were able to help. We received a lot of interest in the proposal but most lenders were unable to assist over a level of £500,000.

The proposal was very urgent for a number of reasons and we were able to agree terms with a lender quite quickly which were acceptable to the prospect. We were able to collate the required information quickly and get the facility set up in the timescales required by the prospect.

If you are looking for a invoice finance facility and you only have one customer please get in touch  with Smart Factoring Quotes today.