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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.