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It is interesting to see certain invoice finance providers now using specialist departments to deal with businesses that operate in the construction sector.

In part this is really good news for businesses that are definitely a part of the construction sector. If they are very much entrenched in contractual debt, applications for payment and stage payments then a lot of businesses would not have a suitable cash flow solution. Now they at least have an option albeit an expensive one with low prepayments. That said it is probably structured and priced according to risk although part of me feels in some instances lenders are taking advantage where they feel they are the only lender willing to assist.

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Confidential invoice discounting is the ideal invoice finance product for businesses that want to do their own credit control and do not want their customers to know that invoices are being funded. Confidential invoice discounting provides businesses with working capital and will prepay up to 90% of the gross invoice value.

Confidential invoice discounting can however be very hard to come by due to the criteria invoice finance companies put in place.

Lenders look beyond the basic invoice finance criteria of selling to other businesses on credit terms and invoicing in arrears of delivery. Lenders will look more carefully at a businesses financial performance and they expect a robust balance sheet. Equally important are the processes that a business employs to collect in outstanding invoices.

 

For many businesses invoices discounting provides the cash that is needed to ensure that their business can survive. Without the necessary cash they cannot pay employees or suppliers. Customer payment patterns can be erratic and can cause cash flow issues and headaches.

Invoice discounting is typically the cheaper of the invoice finance facilities available to businesses. It can also be confidential meaning your customers are unaware of any lenders involvement.

In terms of qualifying for invoice discounting¬†it really rests on processes rather than financial performance. Don’t get me wrong financial performance is important but without the right processes in place you will not qualify for invoice discounting no matter how profitable you may be.

There are 2 main process that will be looked at. Your invoicing process will be interogated. It is important that a good audit trail exists and that invoices are raised in arrears of delivery.

Your credit control process or procedure is also important to demonstrate that debts are collected methodically and professionally rather than not at all or on an ad hoc basis when you have time.

If your invoicing process is not right it is unlikely any type of invoice finance facility will be made available. If your credit control procedures are not adequate it is likely a factoring facility would be offered rather than an invoice discounting facility.

Asset refinance is typically the re-financing of equipent or vehicles already owned by a company.

This can be done to inject cash into the business when the assets are unencumbered. In this instance there will be an initial injection of cash into the business but equally there will be additional monthly repayments that will need to be met.

Alternatively assets can be refinanced to reduce the monthly repayments on an existing finance agreement. This can be done by spreading the repayments over a longer term. Typically this will be done to reduce monthly repayments and as such it has a positive impact on cash flow.

The assets that are suitable for refinance are what we terms hard assets. These are durable, identifiable assets that can easily be valued and readily sold. Suitable assets include vehicles, printing presses, earth moving plant, etc.

Trade finance can be a valuable source of finance that can facilitate international trade. We typically use trade finance along side an invoice finance facility to assist importers.

If an importer has a confirmed order from a credit worthy customer we can provide a letter of credit to a supplier guaranteeing payment. They can then ship the goods. Once received the supplier is paid by the LC. The goods are delivered and an invoice is raised. An invoice finance facility can finance the invoice which repays the trade finance facility. When the customer pays the invoice finance facility is repaid.

The whole transaction from start to finish is financed. This allows small businesses to accept large orders they would otherwise have to turn down because of lack of working capital.

I see a lot of clients who insist from the outset that they want an invoice discounting facility but most of them don’t actually know why.

Invoice discounting is available and importantly it is more readilily available than it used to be. However, factoring is the easier facility to obtain is it represents lower risk to the lender.

So what can invoice discounting offer?

Confidentiality – yes invoice discounting can be confidential but some companies insist on a disclosed facility. Factoring, however, can also be a confidential facility or a disclosed facility.

Control – some companies prefer to keep the credit control in-house rather than outsourcing to a factoring company. So invoice discounting allows a business to maintain control over the credit control function. However, so does a CHOCS facility which is a type of factoring facility.

Cost – many feel that invoice discounting is cheaper. Certainly for larger businesses I would agree. However, at lower levels of turnover there is probably not a lot in it.

Rather than deciding that invoice discounting is what you want I think it is important to consider the structure of your facility, the characteristics you want and then the costs of such a facility.

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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When speaking with clients we are often asked to source invoice discounting facilities on their behalf. When I press the prospect on why they want invoice discounting it is often because they feel the facility is confidential and they want to retain control of their credit control.

I think traditionally invoice discounting was confidential but I am seeing more and more lenders insisting upon disclosure and disclosed invoice discounting seems to be more common.

If you are looking to retain control of your credit control then invoice discounting whether confidential or disclosed will meet your needs. You may also consider a CHOCS facility which is essentially factoring but allows you to do your own credit control. CHOCS stands for Client Handles Own Collections and just to confuse matters it can also be disclosed or confidential. Typically a CHOCS facility will be more readily available than an invoice discounting facility because the criteria are less stringent.

If you are looking for a confidential facility then obviously a confidential invoice discounting facility will meet your requirements. However, you may also wish to consider confidential CHOCS which is more readily available and also confidential factoring where credit control is done by the factoring company but in the name of your business.