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The perception of invoice finance has changed from being the ‘lender of last resort’ to being a flexible and accessible form of working capital for growing businesses.

Over the years the invoice finance industry has changed its own methods internally to become more user-friendly and acceptable. It has embraced online technology to provide a user friendly interface between the lender and the client. These systems differ from lender to lender but they can allow real time uploading of invoices directly from account packages and they can provide in depth reports about such things as debt turn, specific customer reports and the discounts offered. This more accurate and timely monitoring has allowed lenders to monitor risk more closely and has reduced the perceived risk. This is good news for clients of any invoice factoring company as it has driven down costs and increased the prepayments lenders are now willing to offer. These days we often see lenders offering finance at up to 90% of invoice value and recently I saw a client on 95% prepayment with a bank provider.

Credit control techniques have also been developed that use a mixture of computer generated letters and statements alongside the human touch via telephone calls. These techniques are often a vast improvement on the often ad hoc activities employed by a busy business owner. That said the industry at large accepts that not all business owners want to outsource the credit management function of their business as they want to retain control. The truth is that the closer a lender is to a businesses customers the lower the risk is in providing an invoice finance solution. Beyond the traditional facilities of invoice factoring and invoice discounting the industry have developed various products that can meet the requirements of clients yet still mitigate the risks the lender worries about.

The lack of availability of traditional overdraft facilities over the last decade has also bolstered the numbers of invoice finance users in the UK. This is partly due to what is often referred to as the ‘Brumark Case’ where it was deemed banks are not secure against the book debts of a company unless they have taken an active interest in them. This meant that the security of a traditional all-asset debenture was in question and banks forced clients to offer additional security or to move onto an invoice finance facility to replace the overdraft. This perhaps resulted in many businesses being ‘unwilling brides’ in accepting the facilities of invoice factoring companies it did raise the profile of the invoice finance industry at large and did change the perception somewhat.

More recently with the ever publicised ‘credit crunch’ in full effect the banks were not actively lending in traditional formats, many an asset finance company closed it’s doors and the commercial mortgage companies vanished. In stark contrast the invoice finance market remained very active and in particular the independent invoice finance companies. It is true that there were difficulties in providing the credit limits businesses required on their customers but the appetite to lend against good quality book debts remained firmly in place.

Credit terms have become the norm and any ‘small to medium’ business hoping to supply a ‘high street chain’ or a major supermarket are bound by their agreements and standard payment terms. In contrast they are unlikely to enjoy the same terms with their suppliers who will need paying along with wages and other overheads. The end result for most businesses is a stretch on cashflow and as a result an invoice finance facility is a necessity rather than a choice for many businesses. Large businesses are now used to seeing assignment notices on the invoices they receive and will certainly not frown upon the fact a supplier is using invoice finance. Knowing there suppliers have a suitable facility in place to smooth cashflow and fund growth probably gives them comfort.

There are of course still a lot of businesses that turn to the invoice finance companies as the last resort to breathe some life back into their businesses. Some of these businesses really are on their last legs and while the injection of cash can buy them time it is up to the business owners to make the required changes to save the business. If this does not occur then they are simply delaying the inevitable.

There are now circa 50,000 businesses in the UK that use some form of invoice finance. It is a type of finance promoted by both the Federation of Small Business and the British Chamber of Commerce. Large businesses are comfortable with the fact their suppliers use invoice factoring or invoice discounting. Banks are actively encouraging to take up invoice finance wherever it is a genuine option. This type of finance has become more accessible and also more acceptable as a form of finance for successful businesses.

When looking for a new invoice factoring or invoice discounting facility it is important to understand how the offers you receive compare and also how firm those terms are.

You should look to compare how much cash the facilities can generate given the parameters of your business, what the total costs involved are, what services are offered and what your obligations are in terms of administration and security.

Here are a few tips on how to view the offers and also how to compare offers from invoice factoring companies.

1. Indicative offers are merely an indication. Depending on how in depth your meeting was with the invoice factoring company that provided them indicative terms can often no be a true reflection of what you are finally offered. Some lenders even call these ‘Formal Offers’ which can be very misleading so be careful. Until you have actually had a pre lend survey and the file has been submitted to underwriters it is unlikely you will have what is called a ‘Credit Backed Offer’. Until a credit backed offer is issued by an invoice finance company terms can change dramatically. That makes it difficult to meaningfully compare indicative terms.
2. Ensure that you are comparing like for like when looking at pricing – that means understanding exactly what services are being offered. A facility that includes credit protection and a full credit management service will typically cost more than a facility that offers just finance. The question is which best suits your business and which offers best value for the service provided. You need to look at what it is that you want and then look at what is available in the market to see what the best fit is.
3. Understand what the costs involved are and remember to look beyond the headline rates. Headline rates can be misleading and can make a facility appear cheap in comparison to competitors. With any invoice finance facility it is important understand the total costs involved are – it is advisable to do a comparison based on total costs over a 12 month period including set up fees, service fee, discounting fee, bank transfers, audit fees and don’t forget to check your minimum base rate.
4. What security is required from you and your fellow partners/directors? It is important to understand what security you are offering and when this can be called upon. This can differ from lender to lender and it is important to check.
5. What is the contract period and notice period required by the lender? Traditionally lenders used a 12 month contract with 3 months notice but these days it is not uncommon to see contract periods ranging from 28 days to 3 years and notice periods of a month through to six months. If you are being tied in for a long time you should look for more competitive pricing and service level guarantees. Remember once you are tied in it is very hard (or expensive) to terminate the contract early.
6. What credit limits are available for your customers? It is important to check at least your top debtors to ensure that the invoice factoring lender can generate the cash you expect. Remember that the prepayment level they quote is against eligible debts and that means debts within the credit limits given to each one of your customers. Again this is worth comparing early on in the process as it can severely impact on the viability of any invoice factoring facility.
7. Are there any other restrictions on the facility that will impact on the cash generated. For example, what is the concentration limits that restricts the amount of funds generated against your largest customer, what is the cap on exports, what is the total facility limit – is that sufficient, can they accommodate your growth plans?
8. What are the requirements of you from an administration perspective? Some lenders have a fully automated system that links with your accounts package meaning as soon as you upload invoices the cash is available. This means there is no additional work involved in running an invoice finance facility. In comparison some lenders require notification of each invoice manually along with a copy Proof of Delivery. This can be mundane and time consuming so it is important to understand what is required of you to operate the facility.

Comparing invoice factoring quotes can be a time consuming and confusing exercise and it can often be worth using the services of a reputable invoice finance broker or your accountant to look at them impartially. You bank manager will also look to advise on this but please remember they can only really recommend the services of their own bank so they will be somewhat biased.

Reputable invoice finance providers are regulated by the Asset Based Finance Association (ABFA) but please remember the same facility from different lenders can be very different.

Welcome to the Invoice Factoring Forum and Blog.

This is a discussion board for anything related to the invoice factoring industry. As the industry changes as some lenders leave the market and new ones arrive, new products are developed or we come across matters of interest we will keep you updated.

We welcome opinions but where possible please keep them constructive with the view of helping people gain an insight into the industry and more specifically into this form of finance. So if you work within the invoice finance industry, are an existing user of invoice finance or you are considering using an invoice factoring company we would welcome your views, details of your experiences or questions.

Keep checking in to see what has changed!!

Cheap Invoice Finance Companies can be found but ‘cheap’ is obviously relative to other invoice finance providers. Invoice Finance will typically nearly always be more expensive than an overdraft facility, however Invoice Finance offers additional benefits such as flexibility. Smart Factoring Quotes do however have a few lenders at present who claim that they will not be beaten on price so why not help us test that theory for the benefit of your business?

Cheap invoice finance companies will offer the overall lowest fee structure once you have considered the service fee, discounting fee (including the base rate, minimum base rate and discounting margin), audit fees, set up fee, legal documentation fee, survey fee, etc, etc.. The list of additional fees from some lenders can be extensive and unfortunately not always transparent or easy to understand.

When selecting an invoice finance facility and provider my advice would be not to just shop on price. In the first instance you need to see which invoice finance providers can offer you a facility that works for your business and it’s unique circumstances. It is pointless taking up an invoice finance facility that will not provide what you need just because it appears cheap. Find which invoice finance providers can offer what you require and then do the price comparison ensuring you look beyond the headline rates and consider total costs. Remember you will typically be tied in for 12 months with an invoice finance facility.

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