- What’s involved in securing a debtor finance facility?
- How quickly can an invoice finance facility it be arranged?
- How easy is it to terminate?
- What are the potential drawbacks?
- What’s the difference between recourse and non-recourse factoring?
- What are “approved debts”?
- What’s the difference between invoice discounting and factoring?
- How do I know that you will give me truly independent advice?
- Why should I use a specialist broker like you?
- How much will you charge me?
What’s involved in securing a debtor finance facility?
Potential funders will want to meet you to understand your business and needs. If that meeting goes well, they’ll conduct an on-site audit of your books and records. For smaller factoring deals this can often be done in one visit, but otherwise separate visits may be required.
You may be given an in principle offer setting out headline terms and conditions at, or following, the initial meeting, but a formal offer will only be made after a satisfactory audit has been completed. Once you’ve accepted this offer, the funder will draw up the legal documents for your review and signature (ideally after you’ve taken legal advice).
With your authority, the factors will obtain any necessary waivers from your bank or other debenture holders and make cash available as soon as they’ve loaded your details onto their systems and verified the validity of your outstanding invoices.
How quickly can it be arranged?
With co-operation and good information, the process should rarely take more than a few weeks and can often be completed in days.
How easy is it to terminate?
All debtor finance facilities are subject to notice, details of which will be set out in the offer letter and legal documents. Should you decide to repay the facility earlier, you’ll need to negotiate a settlement figure or termination charge.
Some clients are concerned it may be difficult to repay a facility once in place. This can apply to most forms of finance, but is particularly relevant when comparing debtor finance with, for example, an overdraft. In reality, the facility becomes integral to the business. Repayment eventually comes from improved cash management and retained profits. The danger is to create a ‘hardcore’ of borrowing by using funds outside the working capital cycle e.g. by purchasing fixed assets or making long term investments.
What are the potential drawbacks?
Choosing the wrong facility or wrong factor could lead to unduly restricted funding or inappropriate service for your needs.
- There are termination costs if you don’t give the agreed period of notice.
- The factor might terminate the facility; immediately (if you’ve breached the agreement) or following notice, if the perception of risk has risen to an unacceptable level, (e.g. through deteriorating financial performance or material change to the nature of invoicing). These risks can be reduced by making the right choice of facility and provider from the outset.
- There may be a personal liability if the business fails. Most funders seek personal guarantees and / or fraud warranties from the principals of the business. These don’t act as primary security, as in the case of bank guarantees, but may be called upon should they fail to collect the value of outstanding advances from your sales ledger upon insolvency. Providing there had been no impropriety in the way the business or ledger had been run up until insolvency, it would be very unusual for a shortfall to arise during this process.
- It may be difficult to repay a facility once in place.
- Possible damage to customer relationships, but this rarely happens in practice. The factor agrees with you from the outset the way in which they’ll collect your invoices. They’ll encourage you to maintain active involvement, and will be aware that upsetting your customers, without good reason, will damage their relationship with you. As an alternative, we may be able to help you secure a facility that leaves you in control of collections.
- Some think it would be in a factors interest to slow down collections to maximise the interest they earn. In reality, the opposite is true. Average debt turn is a powerful benchmark, to assess their efficiency and quality of their security. The faster the debts turn, the happier the factor will be. The potential income lost as a result of unhappy clients terminating, plus the risk of losses arising from invoices going stale, far outweigh any possible temptation for the factor to earn extra interest.
What’s the difference between recourse and non-recourse factoring?
Recourse factoring doesn’t include bad debt protection, therefore if a customer fails to pay, you take the risk, and have to repay the factor the amount financed against that debt. Non-recourse factoring includes bad debt protection so, if a credit approved customer fails to pay an undisputed debt, the factor will credit you with the amount of the debt up to the agreed credit limit.
What are ‘approved debts’?
These are debts that a factor or discounter is prepared to finance.
In a non-recourse contract this means they are within customers’ credit limits. In a recourse contract it means where they are within general or specific account financing limits, and less than 90 to 120 days old. All disputed debts are normally unapproved and you’ll be responsible for resolving these as a matter of priority.
What’s the difference between invoice discounting and factoring?
Factoring is an advance against your outstanding sales invoices and includes full or partial credit management. Invoice discounting is also an advance against outstanding sales invoices, but there is no intervention in the running of your sales ledger, and it is usually provided confidentially; your customers will be unaware how you have chosen to fund your business.
How do I know that Factoring UK will give me truly independent advice?
Our commitment has always been to do the best for our clients and take the widest possible view of their situation to formulate the most appropriate solution to meet their needs.
We maintain working relationships to director level with over 50 debtor finance companies and receive virtually the same level of introductory commission from each of them.
Why should I use a specialist broker like you?
The misconception is that because debtor finance products are relatively simple to understand, they appear to be the same regardless of the provider.
The truth is very different. The market has developed a sophisticated portfolio of subtly different products, delivered in a variety of ways using different technologies by companies with cultural differences. Understanding and keeping pace with these developments, and the personalities involved, is a full time challenge that any general adviser, let alone prospective client, would find impossible to meet.
How much will you charge me?
Nothing, our service is free to use. We only receive a commission from invoice finance providers upon a successful introduction