- What is factoring and invoice discounting?
Factoring is when a business sells its invoices to a third party and then the factoring company control the sales ledger and collects the debts. The customer is aware of the fact that the invoices have been factored.Invoice discounting is an alternative way of drawing money against your invoices. However, the business retains control over the administration of your sales ledger. The customer is not aware of the fact that the invoices have been discounted.
- How does factoring and invoice discounting work?
Factoring gives business up to 85% payment for a submitted invoice. This enables a business improved cashflow.Invoice discounting works by the invoice discounting firm checking the business, its systems and its customers. The invoice discounting firm then agrees to advance a certain percentage of the total outstanding value of invoices.
- Is factoring and invoice discounting a new financing option?
No, factoring and invoice discounting origins date back hundreds of years. However as computers and internet in banking have become more advanced and done in real time the factoring and invoice discounting sector has become very up to date.
- Is factoring and invoice discounting a type of loan?
No, a loan is based on repayments and lent according to business credit worthiness, whereas factoring and invoice discounting is based on the customers credit worthiness.
- Why would a business do factoring and invoice discounting?A business would use factoring and invoice discounting to obtain cash when the available cash balance held by the firm is insufficient to meet current obligations to pay bills because its customers take up to 90 days or more to pay submitted invoices.
- What sort of business makes a good factoring and invoice discounting client?
A business with a regular monthly turnover of around £5000 and who have several customers.
- What types of businesses use a factoring and invoice discounting company?
- Construction Courier/Logistic
- IT related Manufacturing
- Media/Advertising Printing/Publishing
- Professional Services
- Retail Warehouse Distribution
- Various other ones, please call 0800 597 4757 to check if your business is eligible.
- Are all business transactions eligible for factoring and invoice discounting?
No, not every business is suitable for factoring and invoice discounting. Factoring and invoice discounting is not unsuitable for retailers, businesses where stage payments are the norm or companies dependent on long-term service contracts. Please also note that that factoring and invoice discounting will not help a loss-making company to make profits.
- How does factoring and invoice discounting differ from traditional bank funding?
- Traditional bank funding is focused on the businesses balance sheet, income, industry sector and years in trading.
- Factoring and invoice discounting is available for businesses that are growing too quickly to allow negotiations for traditional bank financing.
- Factoring has a higher cost than traditional bank funding.
- Factoring and invoice discounting gives a business unlimited access to working capital.
- Will I be locked into a long-term client agreement with a factoring and invoice discounting company?
Factoring is generally a long-term agreement. Most factoring and invoice discounting companies require three months’ notice. Some factoring and invoice discounting companies have notice periods of up to a year which could prove expensive for your business. This is generally a point for negotiation with the factoring or invoice discounting company.
- What type of invoices can my business factor or invoice discounting?
Please note that each factoring and invoice discounting company has their own criteria but generally speaking:-
- Invoice must be sent to a business
- Invoice must be raised on credit terms
- Invoice must be raised in arrears of the goods and service delivery
- Invoice must be agreed as payable
- Why shouldn’t i just offer a discount to my customers for early payment instead of factoring and invoice discounting?
In theory this should work but customers tend to accuse businesses that use this method as just building the discounts into the invoices in the first place.
- How much cash can a company receive from factoring and invoice discounting?
The factoring or invoice discounting company buys your invoice and advances you up to 90% of the invoice. Maximum rates differ from business to business and also often depend on the profit margin relating to the business in question.`
- How long before a company receives funding with factoring and invoice discounting?
In an ongoing relationship the invoice seller will get their funds one or two days after the factoring or invoice discounting company receives the invoices.
- What can a business do with the additional cash it obtains from factoring its accounts receivable?
- Cash can be used to cover outstanding payments or transactions. In addition to transaction amounts, the cash may also be required to cover loan agreements.
- The cash can be used for unexpected expenses.
- If a business is anticipating making an investment, the cash can be used to take advantage of opportunities in the marketplace.
- The cash can also be used to acquire assets, retire debt, or meet some major event.
- Does a business need to factor or invoice discount all of their invoices?
A business can choose a ‘selective’ factoring or invoice discounting facility. Under a selective facility a business can opt to factor or invoice discount just some of the submitted invoices. A selective facility is a good option if a business need a certain amount of cashflow guaranteed each month or if one or two customers are good quick payers.
- Businesses not wanting – or needing – to factor their whole ledger can nominate specific customers for us factor or invoice discount.
- Businesses dealing with seasonal orders, such as department stores, supermarkets and insurance companies, can especially benefit from a selective facility.
- Which companies benefit the most from factoring and invoice discounting their invoices?
- Companies that have the uncertainty of not knowing when invoice are going to be paid.
- Businesses that need cash injections cash in line with sales.
- Companies that do not want or don’t qualify for business loans or traditional bank finance.
- Courier companies.
- Logistic companies.
- IT related Manufacturing companies.
- Media companies.
- Advertising companies.
- Printing companies.
- Publishing companies.
- Professional services companies.
- Recruitment companies.
- Retail warehouse companies.
- Distribution companies.
- Wholesale companies.
- How does factoring and invoice discounting affect a company’s relationship with its customers?
- This is a common concern of many potential users of factoring or invoice discounting.
- Factoring is not a negative for a business, although some customers may feel it is.
- The knowledgeable customers will hopefully think its very normal for a business to have a line of credit via factoring.
- Some customers appreciate that factoring allows a business to continue providing customers with a good service.
- If in doubt a business should tell its customers that it uses factoring and tell them to enjoy the favorable credit terms on offer.
- In some industries, financing debts can be associated with a company that is in financial distress. This can result in suppliers becoming reluctant to offer credit terms, which will reverse many of the benefits of the arrangement.
- What should a client do if a customer mistakenly sends the invoice payment to them direct instead of to the factoring or invoice discounting company?
In this situation the funds should be sent straight away to the factor or invoice discounter. Also a note on the correct procedure in future should be submitted to the customer. The lender should also be made aware if the violation.
- Will my company be eligible for factoring or invoice discounting funding if it has a bank loan or overdraft?
This will depend on the lender and the amount of loan or overdraft requested. The decision is down to legal and contractual implications such security and bank mandates. This is a common scenario and one that has led the major banks to introduce in house factoring and invoice discounting.
- If my company is considering an insolvency arrangement, is factoring and invoice discounting funding still an option?
Factoring is one of the most common and easiest types of finance to arrange. As invoice discounting and factoring is based upon the security of invoices it is certainly possible to enter into a Company Voluntary Arrangement or Administration whilst keeping a facility in place. Also in the case of company closing down by way of insolvency liquidation the debts will still be collected by the lender. If the business is to open up again the lender will, in most cases, consider a new facility with the new business.
- What information do factoring and invoice discounting companies require?
- Different factors will have different criteria on information required.
- They will audit the financial records of the business.
- List of customers.
- What security or personal guarantees does a factoring and invoice discounting companies require to finance my receivables?
- The requirements for directors and business owners will vary greatly between invoice discounting and factoring companies and is deciding factor when choosing a facility.
- Most invoice discounting and factoring lenders will insist on an all asset debenture over the company.
- Some lenders request other lenders to waive security over the book debts.
- A personal guarantee from the directors ranging in amounts may also be required too and is quite normal as matter of good faith.
- If there has been a previous business failure or history of insolvency amongst the directors or owners a personal guarantee can be requested.
- An audit may illustrate that the financials of the business are particularly weak and so a personal guarantee may be requested.
- Some factoring and invoice discounting forms may request a charge on a property or by taking security over other assets of a business owner.
- If a formal or limited personal guarantee is not available then a lender My request an indemnity or warranty which essentially entitles them to enforce a personal guarantee if there has been a breach of the agreement due to fraud.
- Is factoring or invoice discounting expensive?
Invoice discounting is an expensive form of financing compared to an overdraft or bank loan. While the cost should always be an important consideration, what you get for your money is even more important. Please read the offer letter and look for any or the following charges and costs.
- Discount charges
- Interest charges
- Annual service charge
- Service fees
- Transactional charges
- Re-factoring charges
- Trust account charges
- Audit charges
- How do factors and discounting firms collect?
The send an invoice or phone and follow an efficient and stringent collection process as would be expected by a professional banking services firm.
- Is the invoice on the factoring or invoice discounting company’s letterhead or the business?
Under a factoring agreement the factors details are entered prominently on the submitted invoice explaining that the collection rights are transferred to the factoring company.
- What happens if the customer does not pay the submitted invoice?
Factoring and Invoice Discounting is recourse lending. If the customer does not pay the invoice, then a personal guarantee may be called upon or a claim on the credit insurance policy will be made.
- Are there any geographical restrictions to factoring?
No, most factoring or invoice discounting companies are offer a national service.
- What is the difference between recourse and non-recourse factoring?
- In recourse factoring, the factor does not take on the risk of bad debts.
- In non-recourse factoring, the factor takes on the bad debt risk. It accepts specified risks around the debtor’s failure to pay, but it does not insure against debts that are unpaid because of genuine disputes. Because of this, non-recourse factoring will be more expensive than recourse factoring.
- Can you factor exports?
Yes, there are some factoring companies that offer a facility for the financing of international sales. They will typically work with a partner abroad who will be responsible for the collection of payment in the country to which you export.
- Are there many providers of factoring services?
Yes, most banks offer the service and in addition there are several independently owned firms.
- How do I choose a factoring or invoice discounting company
There are a variety of factors to choose from. Some are subsidiaries of major banks and financial institutions, others are independent.You need to be able to make an informed choice, so it’s worth approaching more than one factor before making a decision.
Need Help With Factoring? Factoringhelpline.co.uk can help you! Call Us Now on 0800 597 4757.
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