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Invoice Finance

How long does it take to put in place an invoice finance, invoice factoring or invoice discounting facility?

Well the flippant answer is ‘how long is a piece of string?’ However, that helps nobody. On average I would say it takes 3 weeks but I have seen it done in 2 days. While the broker and factoring company plays a very big part in the process it does rely heavily on the requirement and the information that the prospect can provide.

I remember looking at an ‘urgent requirement’ last May and advising we could have a facility in place for the ‘following friday’. While we had everything in place the prospect simply let everyone down by not being able to supply simple information – such as a copy of his passport. This rumbled on until October!!

The flip side of this is a prospect that phoned me on a Saturday evening advising he needed a £1.7m facility in place by the Wednesday. I advised him everything I would need and I had it on Sunday morning. The facility was in place to meet his deadline.

The other key things to achieving a quick turnaround is a) knowing which invoice finance company can meet your needs and b) knowing which person within that company to speak to.

Invoice Finance companies will typically not provide finance to companies in the construction industry that raise applications for payment. However, at Funding Solutions we have been finding finance for such companies from the very outset. Clients of ours include scaffolding firms, tiling contractors, roofing contractors and various other construction related businesses. If you are looking for finance against applications for payment then give us a call.

Part of this is because they cannot actually take assignment of an application as it is not a legal document whereas an invoice is.

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Cash Flow Finance

There are a few finance products that can be described as cash flow finance. These are typically invoice discounting, factoring, trade finance and overdraft facilities.

Overdraft facilities secured by way of a debenture have become almost impossible to obtain from banks without additional security. The reason for this relates to a legal case – Natwest v Spectrum Plus Ltd

Factoring and Invoice Discounting are often referred to as invoice finance.  These facilities are readily available to businesses that sell on credit terms to other businesses. Invoice Finance is provided by the high street banks and also an array of independent providers.

Trade Finance typically facilitates imports and exports. It can provide a valuable source of finance but can also protect both customer and supplier as it ensures that funds are released to the supplier but only when the right goods in the right quantity of the right quality are provided at an agreed point.

By combining trade finance and invoice finance if you have a confirmed order from a credit worthy customer you can fund the entire trade cycle right from customer order through to the customer paying.

It is also important to consider how else you can improve cashflow. Solutions include:

  • negotiate with debtors for quicker payment terms
  • effective credit control – can you improve systems or outsource this function
  • negotiate longer credit terms with suppliers
  • can you reschedule any loan agreements to reduce monthly payments?
  • sell any unused assets such as machinery and vehicles you don’t use
  • can you sub let and part of your premises?
  • can you reduce your wage bill?

An Invoice Finance Quote is available from many places but at Smart Factoring Quotes we provide bespoke indicative terms for both invoice discounting and invoice factoring.

The invoice finance quote is based upon turnover, the number of debtors you have, the number of invoices you issue and our in depth knowledge of the invoice finance market.

Pricing is obviously an important aspect of any facility but it is imperative you look beyond headline rates. Take a look at our article about calculating factoring fees and also the article about comparing factoring quotes.

Factoring fees are often hard to calculate because there are so many variables and potentially hidden charges. Let’s look at each element of the factoring fees and understand how to calculate them:

Factoring Service Fee – this is typically quoted as a percentage such as 1%. This fee is applied to your gross turnover. So if your annual turnover including VAT is £1m then your annual service fee is £10,000.

Minimum Service Fee – it is important to check your factoring contract or terms because there will usually be a minimum service fee. Using the above example if the minimum service fee was £12,000 then this is the service fee that would be paid. The calculation above would only become relevant if the gross turnover was above £1.2m.

Retro Fee – it is important to remember that at the commencement of the facility the service fee will be applied to the gross value of your debtor book. If your debtor books is standing at a gross value of £250,000 and the service fee is 1% then the retro fee will be £2,500.

Discounting fee – this is the charges applied to what you borrow. In simple terms it is the base rate plus the margin multiplied by the average borrowing. It is important to check for a minimum base rate. Do not assume you are borrowing over the Bank of England base rate. If the minimum base rate is 3%, the margin is 2.75% and the average borrowing is £100,000 then the rough discounting fees payable are £5,750. Please, please, please remember to check for the minimum base rate.

Arrangement fee – this is a fee that is charged to set up the facility. It is important to check this as it can be significant. This is certainly an area to negotiate as they are a fairly new feature in factoring agreements as the retro fee was thought to compensate for upfront fees.

Survey Fee – some lenders will charge to do a pre lend survey before making a formal offer while others will do this free of charge.

Audit Fees – some factoring lenders include the cost of audits within the service fee while other charge in addition to the service fee. It is important to check this.

Disbursements – some lenders have a list of disbursements as long as your arm. Please ask for a list of disbursements from any prospective lender and try to anticipate which services you may need over the course of a year.

Total Cost in Year 1

Service Fee or Minimum Service Fee +

Retro Fee +

Discounting Fee (remember minimum base rate) +

Arrangement Fee +

Survey Fee +

Audit Fees +

Anticipated Dispursement Fees

Please remember that not all lenders charge all of the above fees. Please also remember that just because they are not mentioned in the initial indicative terms you receieve does not mean they do not apply. You must ask the question and check all the small print.

Is it worth it?

Well that depends on what you can achieve with the additional working capital. I would suggest doing a P&L forecast and a cashflow forecast both with and without the facility. That will show whether or not the facility is worth taking up or not.

If you have any questions please contact us. Our approach is not a sales approach. We simply explain the pros and cons of each option available to you and allow you to make an informed decision for yourself and your business.

Selective factoring is where the client chooses which customers they wish to factor. This compares to traditional whole turnover agreements where clients are expected to notify their whole turnover from every customer.

Selective factoring is available within the market however very few lenders offer this.

The benefits of selective factoring are as follows:

  • selective factoring means that you can choose specific customers that are perhaps slow payers
  • selective factoring means that specific sensitive customers can be left out of the factoring agreement
  • selective factoring can reduce administration and finance costs as not all turnover has to be included in the agreement.

If you are looking for the best invoice discounting rates it is well worth speaking to Smart Factoring Quotes. We monitor the market for the cheapest invoice discounting rates available at any one time.

At present we have several invoice discounting companies who are actively competing on price and claiming they will not be beaten on price. It is however imperative that any business owner looks beyond the headline rates and considers total costs when comparing facilities from an invoice discounting company. It is also important to remember that the lenders offering the best rates can be among the most risk averse and as such your facility may be structured in a more cautious way.

At Smart Factoring Quotes our approach is to explain the benefits and potential downside of any facility and along side this show the total annual costs involved. This will allow any business owner to consider which facility represents the best value. To me that is the most important factor – compare the benefits the facility offers against the costs and then establish which facility represents the best value to your business.

If you want a helping hand give us a shout!!

If you are looking for Factoring Companies in Yorkshire you have a fair few to choose from. It is however imperative that you choose the right one for your business and it’s own individual circumstances and requirements. If you are unsure as to which factoring company to use in Yorkshire it is worth contacting Smart factoring Quotes in the first instance. Smart factoring Quotes can help you to understand which factoring company can best meet your needs in Yorkshire.

Please keep in mind that while a few factoring companies are actually based in Yorkshire there is a full spectrum of factoring companies that can service a business based in Yorkshire. There are the 4 major banking groups along with new players such as Santander. From there you have independents such as Skipton Business Finance who are firmly based in Yorkshire and then other independents with Yorkshire offices such as Bibby Financial Services, SME Invoice Finance and Aldermore Invoice Finance.

However, factoring companies from across the UK can service Yorkshire based businesses and as such it is important to choose a factoring company based on it’s capabilities and criteria rather than it’s geographic location.