0845 643 9485
Call now for expert advice

Risks

Invoice finance is a form of finance that can provide valuable working capital to your business. I want to explore objectively the advantages and disadvantages of invoice finance.

Advantages of invoice finance

  • invoice finance can provide up to 90% of the value of your sales ledger and ongoing invoices as cash to use within your business.
  • this may allow you to take advantage of settlement discounts
  • if you use factoring you can outsource the credit control of your business freeing up more time to concentrate on growth
  • by taking up credit protection you can eliminate the risk of bad debts
  • an invoice finance facility should grow in line with your sales

Disadvantages of invoice finance

  • an invoice finance facility can be costly when compared to an overdraft facility. However, this is not always a real option.
  • some people perceive factoring as losing control of your sales ledger rather than outsourcing.
  • some people also feel that there is a stigma attached to factoring
  • you can be tied into lengthy contracts and notice periods which can be restrictive
  • hidden costs or at least costs beyond the headline rates can cause frustrations
  • retentions and other restrictions on the funding can also mean that the true prepayment level is not what is expected or anywhere near the headline rate

I believe that an invoice finance facility can work very well in the right circumstances. However, it is important to understand exactly what is on offer. hat means you must understand the total costs involved and also the mechanics of calculating the cash made available.

When looking for factoring advice I am always amazed at who people approach. I accept that my views may be tainted somewhat as I am a factoring broker but it is what I specialise in and I know and am 100% impartial.

Let’s have a look at who business owners will approach to obtain a recommendation for factoring:

Bank managers – your bank manager will only ever recommend their own bank’s factoring company. They are heavily targeted to sell this product so you will receive a single recommendation not taking into account what your requirement is or what the market can offer. In contrast a factoring broker can look at your requirement and recommend the lenders best placed to meet your needs.

Accountants – unfortunately a lot of accountants take commissions from invoice finance providers (as do invoice finance brokers) The problem is that accountants do not specialise in setting up invoice factoring facilities and often do not look at it as in depth as they should. They will also have a few localised relationships rather than using the whole market.

Brokers owned by factoring companies – some brokers are actually owned by factoring companies. As such guess who they are most likely to recommend? If you are using a broker at least ensure they are independent and impartial.

Brokers owned by insolvency practitioners – this may seem like a strange relationship but insolvency practitioners are keen to be appointed by factoring companies. If they can offer factoring companies new business they are likely to receive more appointments. As such you could find yourself placed with a factoring company they owe a favour to rather than the one best placed to meet your needs.

In my opinion you should be taking factoring advice from a specialist and someone who is 100% impartial and independent.

There are a lot of good brokers in the market who are specialists and totally impartial.

At Smart Factoring Quotes we are totally independent and impartial. We are also specialists as invoice finance is all we do.

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.