Working capital is the life blood of every business and the factoring industry is now the preffered supplier of working capital to over 40,000 businesses in the UK. So what is Invoice Discounting and Factoring Finance?
Factoring has replaced the traditional business overdraft and whereas there are a small number of High Street Banks in the UK there are over 30 established factoring companies - including RBS Invoice Finance, Lloyds TSB Commercial Finance, ABN Amro Commercial Finance and BNP Paribas Commercial Finance, to name a few - who between them are able to offer a solution to virtually every proposal that might be put to them. This gives the prospective customer considerable choice however, if you do not know exactly what you are looking for this choice can turn out to be a minefield.
All factoring companies will present themselves very well and often offer you a solution. But it is easy to find yourself signed up to and locked into a facility not entirely suited to your individual company. Using FindmeaFactor.com enables you to ensure that your business will be placed with the most suitable factor offering the appropriate level of service and most favourable terms for your business.
2. Factoring for business
Factoring originally started in the USA and was used to finance the textile trade on the East Coast of
America. It was introduced to the UK about 40 years ago, but the real growth has been over the last
10 years partly as a result of the High Street Banks being less than enthusiastic about offering
facilities to small businesses.
Factoring, in its basic form, is a way of financing your business by assigning invoices to a factoring
company in return for an advance of up to 90% of the gross value of the assigned invoices. The
name of the Factor will be printed on the invoices and your customer will pay the factoring company
direct. On receipt of the payment the balance of the advance will be repaid to your company less
charges. The percentage advance will vary according to the quality of the product and customer. The
stronger your business, product and customer the higher the advance against the invoice.
The factoring company will issue monthly statements and reminders and effectively become an
outsourced sales ledger department. Many small businesses find the more experienced methods
employed by a factoring company a real advantage to ensuring their customers pay on time.
The costs are based on workload and risk. There are two charges, a factoring charge which is
normally a percentage of the gross annual sales (sales including VAT) and an interest charge for the
money that is advanced by the factor.
Many factors offer a bad debt protection against possible bad debts. There will always be an
additional charge for this service.
http://www.findmeafactor.com/factoring.html
3. Is Factoring right for your business?
Firstly your business must be selling a product or providing a service that is acceptable to a factoring company.
Ideally you must be able to show that an invoice is payable once the product or service has been provided to
your customer. Most businesses are suitable but the following issues can be a problem to most factoring
companies;
Goods sold on a sale or return basis
Businesses that buy goods from their customers
Stage payments over a period of a contract
Your customers must not have a clause in their terms prohibiting assignment of the invoice.
Your business must be selling to businesses or Government Bodies. Factoring companies cannot deal with
businesses who sell to consumers. Factoring companies will expect your customers to be creditworthy. It is
important that the majority of your customers are mainly within terms, factoring companies will not advance
against old debts.
Your business will be expected to have a good accounting system that produces a robust paper trail that shows
evidence that your customers have been provided with the goods stated on the invoice. Remember today’s
customer may have to be taken to Court to obtain payment. Unless the paper trail is sound the debt may not be
enforceable.
From your own point of view you will want to ensure that your business benefits from factoring. Lets look at the
scenario below;-
Debtors £100,000
Creditors £30,000 Bank Overdraft £50,000
If we assume that the factor will advance against £90,000 this should raise approximately £76,000. If the Bank
overdraft has to be repaid the exercise will raise an additional £26,000. If the business is growing and the
debtors figure grows to £150,000 then factoring will be a real bonus.
Remember an 85% advance is not automatic and a factor will advance less if your business does not satisfy all
their requirements.
http://www.findmeafactor.com/factoring.html
4. What you need to know
In most cases Factoring companies will review each business with a view on risk and opportunities
of providing a facility for finance, so businesses that show greater opportunity for growth and solid
customer relationships will more often than not be offered favourable terms. We can help you to
ensure that the business and its trading history is communicated effectively to the Factoring
companies, we can also help to filter through the various lenders select those that may have
preference for your business sector, such as with construction, manufacturing, retail or finance.
Do you already use Factoring or Invoice Finance, if so
click here
5. Invoice Discounting
What is invoice discounting?
Invoice Discounting is a similar facility to factoring. With factoring, the factoring company manages the
sales ledger, they issue statements, reminder letters and receive payments directly from the customers.
With invoice discounting you are responsible for managing the ledger and collecting the money from
your customers. Unlike factoring your customer will have no knowledge of your arrangement with the
factoring company as there is no notice of assignment on the invoice.
Invoice discounting has become increasingly popular as many businesses are not keen to have a
notification on their invoices. As the factoring company does not have the same level of control over the
ledger they are more demanding in their requirements before offering such a facility.
Is Invoice Discounting right for my business?
Many of the points mentioned on the factoring page apply to invoice discounting.
However, because the factor is dependent on you for collecting their money you will need to
demonstrate that your business has a good accounting package and that you have a proven record of
managing your sales ledger. The money collected from the customers will have to be paid to the factor
and they will need to be sure that your finances are sound as it is easy to pay such monies into the
business account rather than to the factor. Such a practice represents a serious breach of the facility.
Factoring companies expect businesses to be of a higher quality than those they will be offering factoring
facilities to.
Charges for invoice discounting can be less than for factoring as the factor does not have to carry out all
the sales ledger services that are associated with a factoring arrangement.
http://www.findmeafactor.com/invoice-discounting.html
6. Common problems with Factoring
companies
The Factoring company will not increase my funding limit
If your business is growing satisfactorily and you have run the facility correctly there is no
real reason why the factoring company should not support your growth. However
sometimes the factoring company may become cautious because a similar business in your
sector has had problems or caused them problems. It maybe because there is an overall
limit on a customer that you are not aware of, or internal issues such as their own funding -
the Factoring company in some cases may have internal limits that they cannot exceed.
Communication is often the key and because of our experience in the industry we are
always in a position to advise the best way forward.
The Factoring company wants to renew the agreement on less favourable lending
terms
It is very important to discuss terms of a future agreement well before the renewal date. All
factoring agreements give details of notice period and some factoring companies will leave
the renewal process as late as possible in order to give their client limited options. If the
facility has run well and you have complied with all terms there is no reason why the
agreement should be renewed on less favourable terms. However if the factoring company
has had problems with the account they may wish to change the terms in order to give them
more security and this sometimes means increased charges.
http://www.findmeafactor.com/contact-us.html
7. Common problems with Factoring
companies
The Factoring company offered an advance of 85%, but in reality the overall advance
is much lower
This is a common problem. Most people looking for a factoring facility are focussed on the
percentage advance and do not look at the other key terms. You may have been offered
85% but the factor may have put in a clause setting low limits on your customers and
included a concentration limit which again restricts funding. So whilst you have been offered
an 85% advance you could in reality be drawing down less than 70% of your ledger.
Findmeafactor.com will look at what you are being offered and propose a solution.
The Factoring Company want to change my confidential Invoice Discounting Facility
to a Factoring Facility
It rather depends on how difficult trading has been and what effect it has had on your
facility. Many Factoring companies include clauses which allow them to change the terms if
your circumstances change. If the Factoring company feel their security has been
weakened they may well wish to impose changes.
FindmeaFactor.com can look at the situation and advise you whether the changes are fair
and assist in reducing the impact of those changes
http://www.findmeafactor.com/contact-us.html
8. Common problems with Factoring
companies
My Factoring company has been taken over
Over the last few years a number of factoring companies have been sold and any change of
ownership can have an effect on your business. Any new owner may have their own way of
running things that may not suit you.
It is vital to meet representatives of the new owners in order to ensure that the terms of your
agreement are not going to be adversely changed or amended. Give us a call to discuss
your situation. Certainly do not sign anything until you have spoken to us.
My Factoring Company has ceased to trade
You do not expect your funder to go bust, however it has happened twice in recent years
and I am sure it could happen again. Such an event will have a serious effect on your
business as it is likely that there will be no further money available to you.
If you are in the UK Find Me A Factor's team will look
at what you are being offered and advise you whether
you are being treated fairly
http://www.findmeafactor.com/contact-us.html
9. Factoring terminology and
frequently used terms
Factoring - A financial arrangement whereby a business assigns invoices to a factoring company in return for
a monetary advance against the invoices and a sales ledger service.
Re-Course Factoring- A factoring arrangement where the financial risk of customer failure stays with Client
rather than the factoring company.
Non-Recourse Factoring- A factoring arrangement where the factoring company will carry the risk when there
is customer failure. It is important to note that the factoring company will not offer risk cover on every customer,
only those who are credit worthy.
Credit Insurance - An insurance policy that covers the risk of bad debt failure on your customers, Credit
insurance companies will generally cover between 85% and 90% of the outstanding balance excluding the VAT
element of the debt.
Disclosed Invoice Discounting - A similar arrangement to factoring apart from the fact that the factoring
company does not manage the sales ledger.
Client - Technical name for the customer of the factoring company.
Debtor - A debtor is a business that owes money as opposed to a creditor who is a business that you owe
money to.
10. Factoring terminology and
frequently used terms
Confidential Invoice Discounting - A facility where the factoring company has no involvement in managing
the ledger and the customers have no knowledge of the involvement of the factor.
Discount Charge - The interest charge levied by the factoring company on monies advanced by the factor.
Rates are normally quoted as a percentage over base rate. As with Banks there will often be a minimum rate
charged.
Advance Rate or Initial Payment - The percentage advanced against assigned invoices. This percentage is
against the gross value (including VAT).
Factoring Charge - The service charge normally represented as a percentage of gross annual sales for
operating a factoring arrangement. The service charge is levied monthly in arrears as a percentage of the
invoices raised in the previous month.
Re-Factoring Charge - An additional charge when an invoice becomes of a certain age. Not all factoring
companies levy a re-factoring charge.
Minimum Annual Charge - A factor will always impose a minimum charge that will cover any shortfall should
the factoring charge not cover their basic costs. In general the greater the turnover the lower the percentage
factoring charge (it has been known that a prospect will inflate projected sales in order to get a better rate).
Personal Guarantee - A document signed by a director of the client company confirming that in the event of
the factor losing any money for whatever reason that director will make good that loss. Some guarantees are
for fixed amounts.
11. Factoring terminology and
frequently used terms
Corporate Guarantee - As above but signed by a corporate body such as a limited company or a limited
liability partnership.
Warranty - An undertaking that the person signing the warranty will repay the factor any loss as a result of
breaching material clauses, such as raising false invoices or not passing customer payments to the factor. This
is often called an anti-fraud warranty.
Concentration - A factor will impose a restriction on a single customer who represents a large proportion of
the outstanding ledger. For example if one customer owed £60,000 out of a total ledger of £100,000 and the
factor had a concentration limit of 50% then £10,000 would not be funded.
Factoring Agreement - The formal document setting out the terms of the facility. These documents are
generally of a standard type, with extra clauses being inserted to cover additional circumstances
Debenture - A charge registered against a company showing that a lender has taken security over certain
assets. This charge is registered at Companies House.
Waiver - Also known as a deed of priority. If there is more than one debenture this document sets out who has
a charge over what assets and the order of priority.
CHAPS - An electronic transfer of money from the factor to the client. This method will deliver cleared funds to
your account on the day of the transfer. The charge for this transfer varies between companies but expect to
pay in the region of £30 plus VAT for each transfer.
BACS - Similar to the above, however it normally takes three or four days to receive the transfer. Normally
BACS transfers are free of charge.
12. Factoring terminology and
frequently used terms
Working Capital is equal to Current Assets minus Current Liabilities
Corporate Voluntary Arrangement (CVA) An insolvent company can enter into a company voluntary
arrangement (CVA). The CVA is a form of arrangement, where an insolvency procedure allows a company with
debt problems or that is insolvent to reach a voluntary agreement with its business creditors regarding
repayment of all, or part of its corporate debts over an agreed period of time. A CVA can be applied for by; the
agreement of all directors of the company, the legal administrators of the company, or the appointed company
liquidator. A company voluntary arrangement can only be implemented by an insolvency practitioner who will
draft a proposal for the creditors. A meeting of creditors is held to see if the CVA is accepted. As long as 75%
(by debt value) of the creditors who vote agree then the CVA is accepted. All the company creditors are then
bound to the terms of the proposal whether or not they voted. Creditors are also unable to take further legal
actions as long as the terms are adhered to, and existing legal action such as a winding-up order ceases.
During the CVA, payments are made in a single monthly amount paid to the insolvency practitioner. The fees
charged by the insolvency practitioner will be deducted from these payments. The company is not required to
fund any further costs. Factoring Companies are comfortable financing companies who have entered into such
arrangements as the company is protected from any action by the creditors who are bound by the CVA.
