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Risks

Smart Factoring Quotes are proud to announce the launched of their new and improved website.

Our aim has always been to provide business owners with a balanced view on invoice finance. The new site is more informative and we want to be the preferred source of online information for business owners looking for an invoice finance facility. We want to empower business owners to make an informed decision. That informed decision can be about choosing whether or not to use a form of invoice finance, which facility to use or which lender has offered the most competitive terms for their business.

If you are a business owner who is considering entering into an invoice finance agreement or reviewing your existing arrangements make Smart Factoring Quotes your first port of call.

If you are looking to invoice discount it is worth considering your options very carefully. Different invoice discounting companies operate in very different manners. Depending on how your business operates it could make a huge difference to the amount of working capital your facility generates and also how much the finance costs.

Let’s take a quick look at these 2 areas and see what can happen:

What can impact on costs when invoice discounting?

  • some companies operate a simple charging structure with just a service fee and a discounting fee. Other companies will charge for a variety of additional costs that are not always transparent. Additional fees can include set up fees, arrangement fees, audit fees, renewal fees, minimum service fees, minimum base rate and a whole list of other disbursements. I have been approached by some businesses where the disbursements were more than the main service fee. In effect this was more than doubling their expected costs.

What impacts on cash generated when invoice discounting?

  • beyond the obvious prepayment percentage are various variable that can impact on the amount of cash a facility generates
  • these include the overall facility limit, individual debtor limits, concentration limit, what invoices can be notified, the recourse period, etc..

Elsewhere on the forum I have gone into more detail but I just want readers to be aware that they should be looking beyond headline rates on both pricing and prepayment. It is imperative that any invoice discounting facility is set up properly and for that you need expert independent advice.

If you take out an invoice finance facility and the prepayment is 80% you may well think that you will receive 80% of the total ledger. In theory that should be the case if the facility is set up properly. The key is to understand what your eligible debt is. Let’s look at areas that could reduce your eligible debt:

Concentration Limits – I have already touched on this in a previous post about concentration limits so will not go into too much detail. However, any debt that falls outside the concentration limit will not be eligible for funding and as such can reduce the eligible debt dramatically.

Recourse Period – If you have a recourse period of 90 days any debt that is over 90 days old will not be eligible for funding. If you have a £100,000 ledger but £20,000 is over 90 days old then the eligible ledger is only £80,000. This is what the prepayment level will be applied to.

Debtor limits – If you have 10 debtors of £10,000 you will have a ledger of £100,000. If you had an individual limit of £5,000 for each of those debtors the total eligible debt would only be £50,000 and with an 80% prepayment applied this would generate funding of £40,000. By trading over agreed credit limits you will in effect reduce the actual prepayment level.

It is imperative you set up a factoring facility that can accommodate the unique features of your own ledger. Ensure that the debtor limits and concentration limits are what your require. Shop around! Also ensure that you understand the recourse period and the effects it has on your funding and costs. Work hard to ensure debts are collected within the recourse period.

A concentration limit indicates how much debt an invoice finance funder will allow with a single debtor. By way of an example if your concentration limit is 30% and your total ledger is £100,000 then the lender will only consider £30,000 of funding with any single debtor. Supposing you had £50,000 of debt with your largest debtor then only £30,000 would be considered as eligible debt. This would reduce the total eligible debt to £80,000 so if your prepayment was 85% the funding generated would be £68,000.

It is important to understand the impact of a concentration limit on your funding. In the example above although you as a business have an 85% prepayment level the impact of the concentration limit has reduced the actual prepayment level to just 68%.

Concentration limits will not be an issue for many businesses who have a good spread of customers. However, if you feel that one customer could account for 20% of the money owed to you at any one time it is important to consider the concentration limit. Some lenders impose a rigid 20% concentration limit while others will offer a concentration limit as high as 100% meaning they will finance a single debtor. Be honest with yourself and try to envisage what may happen in the future.

North East Factoring

As a business owner in the North East factoring could provide your business with the cash flow solution it needs to grow and prosper. It is no secret that businesses are taking longer and longer to pay their invoices and as such many business owners have cash tied up in their debtor book. Factoring could be the answer to your cash flow problems but it is important to understand all costs and risks.

Smart Factoring Quotes has an office based in Ryton, Newcastle and works with local businesses to explain not only the benefits of invoice finance but also the costs and risks involved. You can contact us for impartial advice. We are happy to answer any questions and we are totally independent to you can rest assured our advice is impartial.

We don’t believe in the hard sell approach and our aim is to provide you with all the information you need to make an informed decision. This means a balanced approach in explaining the downside of factoring such as the costs and the risks you take in providing security such as personal guarantees and indemnities. Until you fully understand the benefits and the associated costs and risks of any finance facility how can you make a decision?

 

FS Audit Services have an updated website.

FS Audit services conduct periodic invoice finance audits and pre lend surveys on behalf of invoice finance companies.

Reports are produced using each lenders own template. FS Audit services believe that this will avoid any confusion internally and will enhance understanding through familiarity.

Invoice finance can indeed increase profits. However, it is important to remember that it depends on what you do with the cash that the facility generates. It definitely increases your costs as you will have the invoice finance fees to pay so you will need to generate enough ‘new profit’ to cover these additional costs.

These new profits can be generated from new sales that took place because you were able to purchase more stock, fulfill more orders or perhaps pay more staff which will generate additional sales.

I have also dealt with clients who are able to take advantage of substantial settlement discounts. Any saving available that is more than the invoice finance costs leads to increased profitability.

In short yes invoice finance can lead to increased profits. However, that will depend on your own entrepreneurial abilities.

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