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Invoice Discounting

28 Sep

Haulage Company Invoice Discounting »

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Our client is a haulage company. They approached Smart Factoring Quotes to seek advice on how best to set up an invoice discounting facility. They were keen to obtain a facility that allowed ‘export invoices’ to be raised to their european clients for the backloads that they carried back to the UK.

Our client had been through challenging times because of rising fuel prices and exchange rate fluctuations. However, they had maintained turnover and had a well established business.

They had been offered factoring facilities but felt that they were best placed to collect in the debts as they knew their customers best. As such they wanted an invoice discounting facility.

If you look at the whole market of invoice finance companies not all are able to provide invoice discounting. Our client was raising export invoices which reduced the amount of lenders able to assist even further.

Through our knowledge of each lenders capabilities and criteria we were able to introduce lenders that were genuinely capable of helping and more importantly were actively seeking new clients.

As such we secured a confidential invoice discounting facility for our client at very competitive rates.

08 Sep

Confidential Invoice Discounting – Flat Service Fees »

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Recently I have seen quite a few confidential invoice discounting clients looking for flat service fees. The most recent being a recruitment business with a turnover of £56m. I asked why the flat fee was attractive and was told it “impacted less on margins.” Who am I to argue with someone who has a built up such a large recruitment business and has been a user of invoice discounting for over a decade. I did however feel that it warranted a comment on the forum.

So what are the benefits of a flat monthly fee? Well I guess it is easier to budget and potentially cheaper for a company with a rising turnover but in reality the costs should not differ dramatically to a percentage based fee. The way the flat fee or percentage based fee is calculated will be the same for any lender anyway. Most lenders will arrive at a monetary service fee and then convert it to a percentage of gross turnover anyway.

There is obviously a requirement for flat fees though as one of the ‘new kids on the block’ Gener8 Finance use this as their USP.

Personally I can’t see the advantages but I guess it provides certainty and in times such as these something has to be said for that.

I would however welcome anyones thoughts on this……

28 Aug

Invoice Finance – Termination Fees »

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I was reading the posts on a forum hosted by the FSB about factoring and invoice discounting. As someone who is actively involved in the invoice finance industry it did make me cringe a little.

There were numerous posts from business owners and the odd person in the invoice finance industry including myself. The most passionate posts were from the owners of businesses that had got into difficulties and ultimately failed. They described how invoice finance companies had appointed advisors charging huge fees, appointed insolvency practitioners charging huge fees and/or had charged huge termination and collect out fees.

It does seem as though some invoice finance companies will levy these hefty charges when a client is in danger of failing. They are legally entitled to do so but I am not comfortable with the manner in which they do so.

The rationale behind collect out fees is to allow a lender to apply resources to effectively collect out their position. I have no issue with that. However, this fee can often be as much as 10% of the ledger value rather than the amount outstanding. In some instances the workload may well justify such a fee but these instances are few and far between. So why are lenders charging these fees? Well in short and in my opinion because they can.

The forum had some post putting the blame at the door of independent invoice finance companies which I thought was unfair. Some of them are guilty of this but not all and the banks are also actively involved in this practice.

By way of a recent example I had a client who owned a Scaffolding business and they were using invoice finance from a large bank provider. For good reasons they were restructuring and trading through a seperate limited company which in effect would be a phoenix. This had been well managed and the invoice finance facility had been run down to zero and cash was available to pay creditors. All good news and honourable. Unfortunately the bank concerned had a very black and white policy and could not finance the new company as it was technically a phoenix. As such the facility was ceasing and there was to be no ongoing relationship so the bank took advantage of the terms and conditions and charged a fee of 10% of the ledger value as a collect out fee. That resulted in a fee of £16,000 for collecting out what? Well, nothing as they had no outstanding balance. Who would have thought I had scaffolders calling bankers cowboys?!?

What is the effect on these businesses and their directors? Well in most cases I suspect the impact is nominal as any money collected in and not charged in fees would be distributed to creditors including HMRC. However, in some instances directors may well have benefited and my scaffolding client was a good example – it was money that would have ended up in their pocket. Either way I think it is morally wrong to charge for a service that has not been provided.

This practice is gaining publicity and tainting the name of a very good industry that is a valuable source of working capital for many thousands of UK businesses.

26 Aug

Invoice Discounting – The Alternatives »

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Invoice Discounting can often be a difficult facility to source yet many businesses strive for it without considering the alternaitives. Many people feel that the only alternatives are confidential invoice discounting or full factoring where the lender helps collect your invoices and an assignment notice is on each of your invoices.

What are the alternatives? If you are just looking to collect your own invoices and don’t mind disclosure you could look at either a CHOC’s facility (Client Handles Own Collections) or even a Disclosed Invoice Discounting facility. Both offer lenders more comfort in terms of risk as their involvement is disclosed but they offer businesses the control over credit management.

If confidentiality is key some lenders offer confidential factoring. The lender will undertake your credit control they will call up in the name of your business. This offers you the benefit of an outsourced credit control function but with the confidentiality you feel is important.

Finally there is confidential CHOC’s. This offers the benefits of confidential invoice discounting but it offers the lender slightly more comfort. Without getting too technical (and boring) it means the lender is running a mirror ledger at any time meaning their perceived risk is lower.

24 Aug

Factoring in Ireland »

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Factoring in Ireland has become increasingly difficult in recent years as the economy and banking industry in particular has been hit hard.

Arguably when companies require cash flow facilities the most the Irish banks have not been in a position to help except in the most straight forward of cases.

There are however, several invoice factoring companies in Ireland who have stepped in to fill this void. As such Smart Factoring Quotes Ireland was set up to help Irish businesses find the lender best suited to meet their needs.

22 Aug

Construction Factoring »

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Construction Factoring is challenging for invoice factoring companies for a number of reasons.

Any invoice factoring company wants to know that the value of any invoice that they have funded against is secure. In the event of business failure they want to be able to approach the clients customer and request that the invoices they have taken good title to are paid in order to recover their position.

With this in mind if you consider how the construction industry operates you will see how this can cause issues for invoice finance companies.

In the first instance most contractors within the construction industry raise ‘applications for payment’ rather than invoices. As such invoice factoring companies cannot take good title to the applications in the traditional manner.

The work done is usually measured weekly, monthly or against specific milestones and as such applications or invoices are raised for a part completed project. Should the contractor fail to complete the project then liquidated damages can come into effect which render the outstanding invoices worthless. As such any invoice factoring company would not recover their position against these invoices.

Retentions at the end of the contract can also cause issues for invoice finance companies but these effect the prepayment level rather than the ability to provide funding.

Bad news for the construction contractor looking for a flexible working capital facility? Well, it is not all bad news. Smart Factoring Quotes have lenders who can provide invoice finance facilities to construction contractors. Get in touch today.

16 Aug

Will interest rates rise and will that effect your factoring costs? »

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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.

16 Aug

The Long ‘No’ »

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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.

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