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Invoice Finance

There seem to be several invoice finance brokerages appearing that are linked to insolvency practitioners. Only today I was asked by a client of mine why this was so I thought a post may be due on the topic.

In short the insolvency practitioners see the invoice finance leads that give to lenders as a carrot to attract insolvency work from the lenders. In fact some of the IP owned brokers will only give leads to lenders if they give them insolvency work in return. I have seen some e-mail marketing from one such broker offering 2 new deals to a lender in return for a ‘fee generative appointment’.

Reciprocity is a buzz word in many industries these days and the invoice finance industry is no different.

However, in my opinion it does raise concerns for business owners who approach these brokerages looking for independent and impartial advice about factoring or invoice discounting. There is every chance that the business will simply be placed with the lender that they ‘owe’ a deal to. If this is the case it means that they are not really acting in the best interests of that client.

Smart factoring quotes are proud to announce the launch of a factoring blog on their new updated website.

The factoring blog is aimed at business owners who have a factoring facility or are looking for a factoring facility. It will provide relevant industry updates as well as discussing topical issues that business owners encounter both with factoring facilities and also with the economy at large.

We will be welcoming any comments but don’t want to become a message board for rumours or scaremongering.

I am quite often approached by clients who insist on using confidential facilities. The reasons for this can be varied and I always try to accomodate their requirement.

Traditionally confidential invoice finance has been hard to obtain as the only product available was confidential invoice discounting. The criteria for this were quite rigid and it was reserved for large, profitable business with a good finance and administration function.

The good news is that confidential facilities are now more readily available than ever. This makes the life of an invoice finance broker much easier as it means we have a wider range of products to offer clients based on their unique requirements.

Confidential facilities now include confidential factoring, confidential CHOCS there is a new confidential product due to be launched in January 2012 which we are quite excited about.

Temporary Recruitment companies will often use some form of factoring or invoice discounting. It is almost a necessity in terms of how their cash flow works. Typically they are invoicing clients on 30 day terms and yet they are having to pay wages on a weekly basis.

A factoring agreement can provide up to 90% of the invoice value the day after the invoice is raised. This means that wages are covered and you don’t have to worry about waiting for clients to pay.

As an alternative to temporary recruitment factoring there are also full back office solutions that will take care of almost everything except finding clients and temp staff!!

If you are looking for a funding solution for your temporary recruitment company it is worth speaking to Smart factoring Quotes to fully understand what your options are. Smart Factoring quotes have helped to source facilities for temporary recruitment companies who are new starts all the way through to companies with turnovers in excess of £50m.

Spot factoring seems to be gaining popularity within the UK and is a fairly common procedure in the US. We are talking about factoring a single invoice as opposed to factoring whole turnover as you would with a traditional factoring facility.

Obviously if you have an ongoing requirement to factor each invoice or the majority of your invoices it makes sense to seek a suitable factoring facility.

However, if you are looking for a short term solution to a cash flow “hiccup” then spot factoring can be ideal. It means that you can factor a single invoice and once that is paid you have no contractual obligation. You can also revisit the “facility” further down the track if you have another invoice you wish to factor. In essence you can “dip in and out” as you need to.

This can be quite attractive to some businesses. So what are the down sides?

In short the interest rates can put some people off. Most lenders will quote a daily interest rate which sounds nominal. However, this can equate to an APR of circa 80%. But does this make it more expensive than traditional factoring?

Well the interest rate is 10 – 20 times more than what you will pay on a traditional factoring facility but your debt may only be outstanding for 30 days. Traditional factoring can attract minimum service fees and minimum contract periods which can mean if you have a genuine short term requirement traditional factoring can be expensive.

While rates for spot factoring may well be higher than the rates for whole turnover factoring, if you have a genuine short term requirement spot factoring will typically be your cheaper option in terms of pounds and pence!!

So is it the future? I am not sure but it is another valid solution for many businesses so it should be embraced.

As an invoice finance broker it is interesting to hear the complaints I hear from clients about invoice finance companies. Some I may add are totally unfounded and relate to the invoice finance company not agreeing to an overpayment or something that they shouldn’t have to do. However, some seem to follow a common theme and these were highlighted in a forum by the Federation for Small Business.

I want to explore some of the themes that were raised:

  • Hidden costs and unexpected fees – it would be fair to say that not all invoice finance companies are as transparent as they could be in relation to fees. We often see agreements where a minimum base rate is hidden in the small prints. Lists of dispursements are also rarely shared at first meetings which makes comparison of facilities almost impossible. On that basis headline rates can be misleading as some companies have virtually no additional fees.
  • Restrictions on funding. I think this complaint often boils down to a lack of understanding on the clients part and poor communication from the lender. It is imperative any company entering into an invoice finance agreement understand what invoices are eligible for funding. In my mind I believe that should be explained properly by the lender at the outset.
  • Termination fees. This seems to be a thorny topic at present and relates to the fees charged should you wish to leave early. The justification of these fees relates to the fact that the costs of setting up a facility are typically incurred either at commencement or even precommencement by the invoice finance company. As such it takes the contract period to recover these costs and turn a profit. Should a client look to leave early then they incur a loss. However, fees such as arrangement fees, legal documentation fees and survey fees have crept into the industry. On that basis surely the initial set up costs are paid for by the client upfront. If this is the case I am not sure early termination fees can be justified.
  • Collect out fees. This is a fee applied to the ledger upon the failure of the business. Some lenders apply a 15% fee the gross value of the ledger when the company fails. Is this excessive? In some instances most definitely. I saw a bank (one that is now government owned) charge a collect out fee on a ledger where there was actually no borrowing. The implications to business owners is often minimal and it is creditors and often HMRC that lose out on the funds being taken. However, where there is a shortfall and a personal guarantee has been given it could cost the directors personally.

I am sure that there are more complaints from many clients but overall I would maintain that the vast majority of invoice finance clients are happy. there is obviously always room for improvement.

From my perspective it just seems a shame that the same invoice finance companies get mentioned time and again and seem to become notorious for certain practices. It can give the industry at large a bad name.

Invoice Finance is available in Newcastle from a large selection of lenders.

The challenge is to find the best lender to meet the needs of your Newcastle based business.

This will depend on a large number of factors including your financial status, turnover, sector, how you raise invoices and who your customers are. Each invoice finance company has their own individual criteria and characteristics and because of this there will be on particular lender who is best suited to meet your needs.

Smart Factoring Quotes understand each lenders criteria and capabilities. This allows us to source the best possible facility for your business.

We have recently been approach by several businesses in and around Birmingham who are looking for factoring facilities. Being based in Birmingham has some serious advantages as it means that virtually every factoring company in the UK can service businesses there as they are so central in terms of location.

The challenge for any business based in Birmingham is choosing the right lender. Not all factoring facilities are the same – far from it. As most require a contract to be signed it is important you choose the right factoring facility and lender.

Invoice finance companies each have their own target market and this will be based on business turnover, sector, geography, debtor profile, etc.