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Factoring

Invoice Factoring Company – Why does it take so long to set up a facility?

In short it shouldn’t.

The process should in theory be fairly simple for most businesses. The key is to finding lenders that have an appetite for your business in terms of size, sector and geography. From there the key is providing total transparency.

The process will usually start with a first visit by a sales person from the lender. They should assess your suitability and issue you with terms. This is a key stage as if they don’t address potential issues early on you could be going a long way down a road that will not have a positive conclusion.

If you accept the terms the lender will conduct a pre lend survey which is a mini audit focusing on your processes surrounding invoicing and collecting in debts.

If this goes well a final offer will be issued to you and legal documentation signed. If there are any questions you may be asked for further information.

The final step is usually the verification of your sales ledger and perhaps a reference from your existing invoice finance provider if you have one.

All in all the process can comfortably be done within 3 weeks with most lenders. I have seen deals done within a week where necessary.

So where do delays occur when setting up an invoice finance facility?

It is important to remember that you as a prospect will have a lot to do in this process and a lot of information to provide. This can use up a lot of time as an invoice factoring company will be waiting on you.

Sometimes if information is not disclosed from the outset or the sales person does not ask the right questions the facility can fall down at the later stages meaning the process starts again with another lender.

To ensure things go smoothly divulge anything you feel is relevant at the outset. If the sales person has not demonstrated a good understanding of your business how can they hope to convince their credit team you deserve a facility. If they do not give you confidence move on to another lender. Provide information in a timely fashion – this saves times but also instills confidence.

If you have any doubts it is worth using a reputable invoice finance broker.

I have been approached by a client today who has a ‘non-recourse’ facility with an independent invoice factoring company. This is to say they have a credit insurance policy to cover their debtor book. As such the client should not incur any bad debts as long as they operate within the given credit limits.

However, it has transpired that a customer of our client has gone under owing them £150,000. There was a £150,000 credit limit in place so the client thought everything was covered.

The insurance company has now come back and queried certain procedures relating to timesheets and the dates of invoices and our client has provided everything that has been asked.

In short they insurance company has paid £60,000 and is disputing the balance on what appears to be minor technicalities.

It is not my place to say who is in the right or wrong here but the important facts are that the independent invoice finance company advised the client he was set up on their insurance. Now that insurance company has disputed the claim the client is now left owing the lender for the balance of £90,000.

Without access to the full facts it is hard, in fact impossible, to establish blame. The important thing is to highlight that you should request full terms and conditions for any credit insurance that your lender arranges for you. You should ensure this has been received and understood prior to signing any agreement. Importantly you should also ensure that they can provide the limits that you require.

I have recently taken on a case for a client who is leaving a back office service provider and wanted to highlight some risks associated with employing such a company.

My client is a recruitment business who use a back office service provider to raise invoices, do the payroll, credit control, etc.. This service is similar to factoring but is typically provided to temporary recruitment agencies as an opportunity to outsource almost everyting so the business van focus on sales and placements.

These services receive varied feedback in terms of service levels but unfortunately in this instance the implications are for more serious. The lender concerned has failed to pay over circa £500,000 of monies that was due to HMRC and do not appear to be in any position to do so soon. It would appear that our client remains ultimately responsible for bringing the situation up to date with HMRC.

I understand there was a similar situation with a payroll finance company called Wageroller who went under leaving their clients owing large sums to HMRC.

There are obviously some very reputable providers and Lloyds TSB are possibly the largest with their Cash Friday facility. The fact remains that not all other providers seem to be as reputable or as financially robust so be careful.

I have not mentioned the providers name as I have not spoken to them to hear if there is another side to the story. It does however raise concerns and is certainly worth a post.

Interest rates in the form of the Bank of England base rate have remained unchanged at 0.5% for the last 17 months. These low base rates seem attractive to borrowers but are crippling savers who rely on the income their savings generate.

Will rates rise? I think the evidence overwhelmingly suggests that these ultra low rates are not sustainable and as such, yes rates will rise. In a poll of economists by Reuters (29 July) the conclusions were that interest rates would rise from April-June 2011. It was thought that they would rise to 1.5% be the end of 2011.

If you are a factoring client, how will the impact on your costs? Well in some cases it will obviously increase your costs of borrowing money as your discounting fee is made up of a margin and a base rate. As the base rate rises then your costs would increase surely? The answer is maybe. It will differ from lender to lender.

HSBC invoice finance for example have no minimum base rate so any increase from the 0.5% Bank of England base rate will be felt by their clients who are currently enjoying these very low rates.

However, Bibby Financial Services are currently using 3 month LIBOR as a base rate and in the quotations I have seen are using a minimum base rate of 3%. This means that until the base rate (3 month LIBOR in this instance) increases above 3% their clients will not be effected by the potential base increases.

Close Invoice Finance use 1 month LIBOR as a base rate but have an overall minimum discounting fee of 4.5% . So any base rate increases would only impact on the clients of Close Invoice Finance if their total discounting fee increases above 4.5%.

Looking at the invoice finance market in it’s entirety there are a lot of clients who won’t feel the impact of any impending rate increases for some time.

Is this good news? It depends on how you view matters but some may argue that the ones who will not feel the effect of the increases are paying too much at the moment anyway. Then again, you can only choose the best of the offers that are made available to you.

In dealing with various businesses and lenders as an invoice finance broker the biggest frustration is when a lender takes a long time to say ‘no’.

In my position as a broker I always aim to manage any clients expectations in terms of what can be reallistically achieved in the market given their particular circumstances. In dealing with any lender I try and highlight any issues upfront so that our energies can be focussed on mitigating the risks associated with those issues. My aim in doing this is to be honest and maintain a solid reputation but also to avoid any last minute issues. If a lender discovers the deal they have been looking at for the last 6 weeks is not what they thought because of some ‘skeleton in the closet’ then it will come as no suprise that they may change or retract their original offer.

The flip side of this is when a lender is provided full information on day one and the risks have clearly being highlighted to them. Yet after 2 months of visits and negotiations they say ‘no’ and the reason given is what was flagged into them in the first instance. This is frustrating for the broker such as myself but for the business concerned can be catostrophic.

In the most recent instance of this kind I had a client who had breached a facility with the invoice finance arm of a major bank. There had been a number of fairly minor breaches over a 5 month period and as such the lender had given the client 3 months notice to find an alternaitive funder. I approached an independent lender and flagged in the issues asking at the end of my email, “Given these breaches could you assist?”. The lender assured me they still had an appetite to assist and that their credit team were on board. They went to various meeting and chased the prospect for a decision until he finally accepted their terms. A full pre lend survey was done a month into this process and the feedback was that the survey had gone well. However another month further down the line and only when I phoned for an update was I told the facility had been declined. ‘Why?’, I asked. ‘The client has breached his facility with the existing provider’, was the response. In instances like that you have to laugh or you would cry. However, the implication for the client was that in less than a month the existing provider would be looking for full repayment and as such his business was at risk. The lender concerned made apologies and moved on to tell another broker how their ‘national, local and personal’ presence is best for their clients. I have to say I disagree. This has only happened to me twice this year and both times, despite having the assurances of senior people, this same lender have dropped out at the last minute after a protracted process and have declined the deal based on something they were aware of on day one. The lender concerned will not be dealing with any introductions from me going forward having shown it is not an issue with individuals or regions but a company wide problem.

I am writing this to share an experience so that clients don’t make the same mistake. So how do you ensure this doesn’t happen to you? In time critical situations like the one I have described I think it is important to run at least 2 invoice finance companies in tandem through the application process. Be totally upfront with them from the outset and highlight any risks to them. This way they can look to structure a facility that meets your needs but also mitigates their concerns over risks. The time in working with 2 lenders until you have credit backed offers will be repaid in peace of mind and in ensuring you are not back at square one should a lender decide they no longer have an appetite to assist you.

The Hidden Costs of Invoice Factoring

Typically an invoice factoring company will quote two headline rates – service fee and discounting margin. The service fee is quoted as a percentage and is applied to the gross value of each invoice notified. The annual service fee charged by factoring companies is therefore the percentage service fee applied to the gross turnover. The discounting margin is the percentage above the base rate that an invoice factoring company charges for the amount that they have advanced to you. The discounting fee equates to the interest rate that you would pay on an overdraft facility.

Beyond these headline rates are charges that are perhaps not so obvious and can make the comparison of facilities from different lenders quite challenging. These are a few of the charges that you should be asking about:

The base rate and minimum base rate. Some invoice factoring companies will quote over bank base rate while some will quote over 3 month LIBOR. It is important to understand how these differ and how they fluctuate. Some lenders will also have a minimum base rate which when base rates are very low come into effect. It is important to ask what the minimum base rate is as this can have an impact on the amount of discounting fees that you pay as a client.

Minimum service fee. All lenders will implement a minimum service fee and this can be set as a monthly, quarterly or annually paid fee. A major variable in calculating the service fee that you pay is turnover. If your turnover should drop dramatically and the invoice factoring company does not recover the fees they had expected then the minimum fee will kick in.

Audit fees are also charged by some lenders whereas as some other lenders include this as part of the service. If you are comparing costs and a lender is charging £500 a quarter for audit fees then it is important you are aware of this.

CHAPS transfers are transfers that allow you access to your cash on the same day. These costs can be significant as in many cases people will use these on a daily basis. These costs can vary from lender to lender and it is important to take these into account.

Arrangement fees are charged by some lenders and are a type of fee we are seeing creep into the pricing models of more and more lenders. It is important to remember that the service fee you pay is applied to the balance of your ledger when you commence so there is already a sizable fee to pay on day one. The addition of a separate arrangement fee obviously adds to this.

Legal documentation fees are charged by many lenders and again differ from a nominal sum to quite significant amounts. This can be on top of an arrangement fee.

Refactoring fees are charged by some lenders when they recourse invoices back to you as an invoice factoring client. That means that when an unpaid invoice ages beyond the funding period you have agreed with a lender they will pass this invoice back to you and charge you a percentage fee for doing so. This can be frustrating for full factoring clients because they have paid a service fee to a lender to not only provide finance but also the collect in invoices on behalf of the client. In this instance they are actually charging you more for not providing a service you have already paid for. The logic behind it is that it encourages you to get involved and help collect in the debt or at least provide them with information such as a proof of delivery to help the factoring company resolve any query.

To fully understand the list of charges of any individual invoice factoring company it is important to request a list of their disbursements.

In discussing the charges above it is important to remember that invoice factoring can be labour intensive for the invoice factoring company and if they are providing a good service they deserve to be charging a reasonable and fair amount for that service. It also important to understand what you are receiving for your money. In terms of credit control how does the lender you are speaking to go about the credit control? Some lenders will simply send out monthly statements and a series of automated letters and this may work for your debtors. Other lenders will telephone chase every invoice when it falls due and as such are providing a more hands on service and perhaps deserve to charge more for this. The question is what level of service are you looking for as a client?

The costs described above should also be offset against the time that an invoice factoring service frees up for the client. Will this time be focused on sales and growing the business? If so what are the additional benefits? In addition what can be done with the cash generated? Be entrepreneurial – if you now have an additional amount of money in the business what can you do with it? How much more money can you make with it?

The key is to understand what you will be paying for the service that you receive. By understanding all the potential fees you can compare the expected annual costs of each invoice factoring offer you receive. By also understanding what level of service is being provided you ensure you choose the offer that represents the best value to your business.

The perception of invoice finance has changed from being the ‘lender of last resort’ to being a flexible and accessible form of working capital for growing businesses.

Over the years the invoice finance industry has changed its own methods internally to become more user-friendly and acceptable. It has embraced online technology to provide a user friendly interface between the lender and the client. These systems differ from lender to lender but they can allow real time uploading of invoices directly from account packages and they can provide in depth reports about such things as debt turn, specific customer reports and the discounts offered. This more accurate and timely monitoring has allowed lenders to monitor risk more closely and has reduced the perceived risk. This is good news for clients of any invoice factoring company as it has driven down costs and increased the prepayments lenders are now willing to offer. These days we often see lenders offering finance at up to 90% of invoice value and recently I saw a client on 95% prepayment with a bank provider.

Credit control techniques have also been developed that use a mixture of computer generated letters and statements alongside the human touch via telephone calls. These techniques are often a vast improvement on the often ad hoc activities employed by a busy business owner. That said the industry at large accepts that not all business owners want to outsource the credit management function of their business as they want to retain control. The truth is that the closer a lender is to a businesses customers the lower the risk is in providing an invoice finance solution. Beyond the traditional facilities of invoice factoring and invoice discounting the industry have developed various products that can meet the requirements of clients yet still mitigate the risks the lender worries about.

The lack of availability of traditional overdraft facilities over the last decade has also bolstered the numbers of invoice finance users in the UK. This is partly due to what is often referred to as the ‘Brumark Case’ where it was deemed banks are not secure against the book debts of a company unless they have taken an active interest in them. This meant that the security of a traditional all-asset debenture was in question and banks forced clients to offer additional security or to move onto an invoice finance facility to replace the overdraft. This perhaps resulted in many businesses being ‘unwilling brides’ in accepting the facilities of invoice factoring companies it did raise the profile of the invoice finance industry at large and did change the perception somewhat.

More recently with the ever publicised ‘credit crunch’ in full effect the banks were not actively lending in traditional formats, many an asset finance company closed it’s doors and the commercial mortgage companies vanished. In stark contrast the invoice finance market remained very active and in particular the independent invoice finance companies. It is true that there were difficulties in providing the credit limits businesses required on their customers but the appetite to lend against good quality book debts remained firmly in place.

Credit terms have become the norm and any ‘small to medium’ business hoping to supply a ‘high street chain’ or a major supermarket are bound by their agreements and standard payment terms. In contrast they are unlikely to enjoy the same terms with their suppliers who will need paying along with wages and other overheads. The end result for most businesses is a stretch on cashflow and as a result an invoice finance facility is a necessity rather than a choice for many businesses. Large businesses are now used to seeing assignment notices on the invoices they receive and will certainly not frown upon the fact a supplier is using invoice finance. Knowing there suppliers have a suitable facility in place to smooth cashflow and fund growth probably gives them comfort.

There are of course still a lot of businesses that turn to the invoice finance companies as the last resort to breathe some life back into their businesses. Some of these businesses really are on their last legs and while the injection of cash can buy them time it is up to the business owners to make the required changes to save the business. If this does not occur then they are simply delaying the inevitable.

There are now circa 50,000 businesses in the UK that use some form of invoice finance. It is a type of finance promoted by both the Federation of Small Business and the British Chamber of Commerce. Large businesses are comfortable with the fact their suppliers use invoice factoring or invoice discounting. Banks are actively encouraging to take up invoice finance wherever it is a genuine option. This type of finance has become more accessible and also more acceptable as a form of finance for successful businesses.

When looking for a new invoice factoring or invoice discounting facility it is important to understand how the offers you receive compare and also how firm those terms are.

You should look to compare how much cash the facilities can generate given the parameters of your business, what the total costs involved are, what services are offered and what your obligations are in terms of administration and security.

Here are a few tips on how to view the offers and also how to compare offers from invoice factoring companies.

1. Indicative offers are merely an indication. Depending on how in depth your meeting was with the invoice factoring company that provided them indicative terms can often no be a true reflection of what you are finally offered. Some lenders even call these ‘Formal Offers’ which can be very misleading so be careful. Until you have actually had a pre lend survey and the file has been submitted to underwriters it is unlikely you will have what is called a ‘Credit Backed Offer’. Until a credit backed offer is issued by an invoice finance company terms can change dramatically. That makes it difficult to meaningfully compare indicative terms.
2. Ensure that you are comparing like for like when looking at pricing – that means understanding exactly what services are being offered. A facility that includes credit protection and a full credit management service will typically cost more than a facility that offers just finance. The question is which best suits your business and which offers best value for the service provided. You need to look at what it is that you want and then look at what is available in the market to see what the best fit is.
3. Understand what the costs involved are and remember to look beyond the headline rates. Headline rates can be misleading and can make a facility appear cheap in comparison to competitors. With any invoice finance facility it is important understand the total costs involved are – it is advisable to do a comparison based on total costs over a 12 month period including set up fees, service fee, discounting fee, bank transfers, audit fees and don’t forget to check your minimum base rate.
4. What security is required from you and your fellow partners/directors? It is important to understand what security you are offering and when this can be called upon. This can differ from lender to lender and it is important to check.
5. What is the contract period and notice period required by the lender? Traditionally lenders used a 12 month contract with 3 months notice but these days it is not uncommon to see contract periods ranging from 28 days to 3 years and notice periods of a month through to six months. If you are being tied in for a long time you should look for more competitive pricing and service level guarantees. Remember once you are tied in it is very hard (or expensive) to terminate the contract early.
6. What credit limits are available for your customers? It is important to check at least your top debtors to ensure that the invoice factoring lender can generate the cash you expect. Remember that the prepayment level they quote is against eligible debts and that means debts within the credit limits given to each one of your customers. Again this is worth comparing early on in the process as it can severely impact on the viability of any invoice factoring facility.
7. Are there any other restrictions on the facility that will impact on the cash generated. For example, what is the concentration limits that restricts the amount of funds generated against your largest customer, what is the cap on exports, what is the total facility limit – is that sufficient, can they accommodate your growth plans?
8. What are the requirements of you from an administration perspective? Some lenders have a fully automated system that links with your accounts package meaning as soon as you upload invoices the cash is available. This means there is no additional work involved in running an invoice finance facility. In comparison some lenders require notification of each invoice manually along with a copy Proof of Delivery. This can be mundane and time consuming so it is important to understand what is required of you to operate the facility.

Comparing invoice factoring quotes can be a time consuming and confusing exercise and it can often be worth using the services of a reputable invoice finance broker or your accountant to look at them impartially. You bank manager will also look to advise on this but please remember they can only really recommend the services of their own bank so they will be somewhat biased.

Reputable invoice finance providers are regulated by the Asset Based Finance Association (ABFA) but please remember the same facility from different lenders can be very different.