Invoice Discounting

16 Aug

Comparing Invoice Factoring Quotes and Understanding Total Costs. »

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.

13 Aug

The Changing Perception of Invoice Factoring »

by Invoice Factoring Forum

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.

13 Aug

Hints and Tips – Comparing Invoice Factoring Quotes »

by Invoice Factoring Forum

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.

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