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invoice discounting vs factoring

Sunday, April 18th, 2010

And the winner is! It depends!

Both an invoice discounting and factoring facility will release up to 85% of your unpaid invoices on a revolving credit basis. In theory both facilities will grow as your turnover increases providing you with valuable cash and working capital. In our opinion both are far better than a bank overdraft which is not as flexible and will be capped depending on how profitable or the level of security available.

Both factoring and invoice discounting charge an interest rate for the amount of money that you borrow which is comparable to a bank overdraft. If you don’t use the facility than there will be no interest payment. The rate of interest may vary from between one and a half percent over base to as much as three percent over bank base rate. Some finance companies charge their interest rate to Libor which at the moment doesn’t make much difference because both are about the same. Beware some finance companies charge a minimum base rate so you need to double check the small print.

The main difference is that factoring provides credit control whereas invoice discounting is provided in a confidential manner and provides a cash flow facility only. As such the service fee with a factoring company  is usually higher than with invoice discounting. With factoring they will call your customers and ensure that payments are received within the ninety days permitted. Although the costs of factoring his higher for smaller businesses compared with the cost of outsourcing credit control it can be a very cost effective form of finance.

However if you are a new start business, have a small net worth or are having trading difficulties you are unlikely to be offered invoice discounting. This is because invoice discounting can be  susceptible to fraud. As invoice discounting does not enable the provider to do any checks there have and will be cases of fresh air invoicing.

Bad Protection Grows

Friday, April 16th, 2010

It appears according to a number of factoring and invoice discounting companies  that bad debt protection is one of the fastest growing finance products. Bad debt protection is added onto a factoring or invoice discounting facility and provides an insurance policy against any of your debtors going bust. It is otherwise known as non recourse factoring or invoice discounting.

These figures support and emerging trend for better organised businesses to protect themselves against the recession. Businesses have been driven to asset based lenders early in the recession for their accessibility an reliability as the banks become more difficult to deal with and pulled down the shutters. Even as we speak the importance of asset based lenders is taking on a greater importance as factoring and invoice discounting facilities are able to link their facilities to sales performance. This market is uniquely equipped to protect against over trading by ensuring that appropriate levels of funding are provided against a businesses sale ledger.

Experience suggests (and it was someone older than me that told me) that insolvency increases as we come out of a recession, so it makes to sense to protect your business with bad debt protection. As with any finance company, different factoring and invoice discounting providers provide different levels of bad debt protection. The banks tend to use their own in house insurance companies whereas the independents obtain their bad debt protection from independent insurance companies.  Which one is better for you depends on the spread and quality of your debtor book.  As one of the countries leading invoice discounting and factoring broker, we can help you obtain the best level of bad debt protection.

Invoice Finance Companies

Thursday, April 15th, 2010

A quick search of the internet will reveal thousand of results for any invoice finance or factoring product. To work out which finance companies you should be contacting it may worth explaining the difference between the different results that you will find on the internet.

First of all there are bank operated invoice finance companies probably high street names that we all recognise. Secondly there are the independent lenders that do exactly the same as bank owned factoring companies however they are non bank owned and get their funds from other sources. Thirdly there are independent finance brokers like XL Business Finance that are not lenders but provide advise as to which will be the best invoice finance company for a particular business.

In our opinion we believe you will get the best advise from an independent factoring broker. They make their living making sure that they introduce the most appropriate funder to the customer. A number of sensible questions concerning the turnover, profitability , length of time trading quality and quantity of the debtor book will determine the most appropriate two or three funders. Not all finance companies are good at funding the same businesses. They all have their sweet spot and with over ten years experience in advising clients XL Business fiannce can find the most appropriate funder for your particular needs and requirements.

A good example we have dealt with recently was a business trading with a turnover in excess of £100m. The business was funded by a well known high street bank but the amount of the facility required was above the level this bank was comfortable with. The client had a number of meetings with other high street banks that again could not get comfortable with the required facility. We were able to recommend a couple of lessor known finance companies with the expertise and financial clout to take on such a business.  To date the customer is absolutely delighted.

Factoring Explained

Monday, April 12th, 2010

Factoring is fast becoming the most popular  working capiatl facility proving a life line to many busineses. Factoring is the process of obtaining cash against your inpaid invoices typically up to 85% of the total amount. A specialist factoring company wil use  the unpaid invoice as their security and if anything happens to your business the finance company will collect the unpaid invoices to repay the debt. Factoring or even invoice discounting is great for a business that has a turonover of over £100k and if yur businesss is growing fast it will provide to working capital to fund purchaases of new stock and pay those all importnat bills.

Costs vary depending upon the size of your debtor book, the number of invoices you raise on a monthly basis nd the work involved in colecting your invoices. Rememeber factoring is a value aded service in that the factoring company also provide you with crerdit control to collect and chase your invoices leaving you free to get on with running your business.

There are two parts to the costing for a factoring service.  Firstly there is the cost of the money borrowed. This is comparable to a bank overdraft facility and is you charged at 1.5-3% over bank base rate or LIBOR depending on the finance company involved. Beware certain finance companies have a minimum base rate which could make thir headline rate be more expensive han it actually apears at first glance.

The second part to the charge is a service fee which is the charge in relation to the credit control part of the service. Depending on turnover, the number and the quality of your debtor book a small business with a turnover of over  approx £100,000 may expect to pay a few hundred poundds per month. Obviously this increases a st eturonover of the business also increses. Remember that the service fee compared to the cost of employing a full time crdit controller is very competeitive.

lnternational Trade Finance

Sunday, April 11th, 2010

Most businesses will go to their banks to organise international trade finance facilities  which is great if you are a profitable business, have a very strong balance sheet and also have  plenty of security to offer. One high street bank is very strong at international trade finance. No prises for guessing but feel free to give us a call if you are stuck. So what happens if you are not strong enough to organise funding via the high street to help you purchase of buy imported goods. Thankfully there are one or two options available to help the less profitable and established businesses.

Firstly there a one or two specialist factoring and invoice discounting companies that provided you have a buyer for your imported goods will provide a trade facility for you to import. They lend you the cash against the goods and as soon as they hit the UK and are delivered to your end user either the customer pays for the cash immediately or the trade facility is repaid from a factoring or invoice discounting facility that will repay the trade facility. Simple provided the margin is good and the goods are non perishable this kind of trade finance shouldn’t be an issue

Secondly there are one or two independent financiers that under the right circumstances will provide letters of credit without the onerous security that the banks require. The facility works in exactly the same way as above that the trade facility of letter of credit is repaid from the sale of the goods to your end user or customer. Again this can be by cash on delivery or provision of factoring or invoice discounting facility on the raising of the invoice.

XL Business finance has over 10 years experience in helping business with innovative finance solutions which might not necessarily be available fro the high street banks and finance companies.

Invoice factoring a new start business

Thursday, April 8th, 2010

It was once said that eight  out of ten businesses went bust not because they were not profitable but because they ran out of cash and were unable to manage their cash flow adequately. Any new start business will probably go to their bank as a first port of call and try and arrange a bank overdraft. If you have a sympathetic bank manager and if he likes you allotyou might get a £10k facility. Anything over and above that they will want personal guarantees , register a debenture over the business and will need to take a charge over your personal property providing you have enough equity.

The next obvious step for additional working capital would be to apply for an invoice factoring facility which will release up to eighty five percent of your unpaid invoices. Now in our opinion the banks are not the best at providing factoring to new start businesses. You will be a very small fish in a very large sea and as such service and accessibility may indeed frustrate you somewhat.  However because you have a small overdraft and a debenture registered you will be railroaded into using the banks in house factoring company because to use a third party funder you will need to repay the overdraft to get the debenture released. A debenture is a fixed and /or floating charge over the book debts of the business. Any cash flow facility either invoice factoring or overdraft will require that the lender has a debenture.

Ok the bank would seem the obvious choice however as soon as the business starts to grow you may find that your overall limit is restricted and you end up with less cash with the banks overdraft and factoring facility compared with a independent factoring facility who traditionally will fund your invoices to a higher level. In addition as your turnover starts to grow the problem increases further whereby it is difficult to get cash. You then start looking around for a more flexible funder and hopefully in the meantime cash flow isn’t affected beyond repair.

Why use an invoice financing broker?

Wednesday, March 24th, 2010

Any search of google will reveal hundreds of choices of invoice financing companies. There are three main types of companies. Independent brokers, bank owned invoice finance companies and independent factoring and invoice discounting companies. Independent brokers are a good place to start. Not to be confused with an independent factoring or invoice discounting company that provide the funding and service themselves but are independent in that they not bank owned.

A good independent broker will know the factoring and invoice discounting market inside out. Based on your businesses particular circumstances such as length of time trading, location , profitability, turnover and quality of debtor book he or she will be able to narrow the choice of factoring companies down to about two or three of the most suitable funders. Different lenders have different lending criteria and most have different sweet spots. What is one mans poison is another mans whatsit. We would always recommend having a meeting with a max of two to three providers so you can a feel for personalities and decide which finance company that you may be able to work more closely with.

We would also be wary of a site that links in to a number of different funders to provide the cheapest possible quotation. There are so many factors which need to be taken into consideration when choosing your funding partner. Although cost is certainly important it shouldn’t be the be all and end all as there are so many other consideration which should be considered.

XL Business Finance is one of the leading indpendent brokers in this firld and without a doubt will certainly be able to add value to the proceedings.

Financing Imported Goods

Friday, March 19th, 2010

Many businesses are seeking finance to enable them to import goods from foreign countries. Providing that the goods have been pre sold in this country it may be possible to get funding from start to finish by way of an international trade finance facility dove tailing against a factoring or invoice discounting facility.

Many of the high street banks will provide funding enabling business to import goods however many banks will provide a line of credit against the strength of the business in terms of profitability, strength of the balance sheet and the length of time the business has been trading. You must also bank with that particular banking institution and more often than not security such as charges against property etc is often required. Therefore as with most high street banks they can only provide funding for the customers with the best possible credit score.

This leaves a big gap in the market for businesses unable to obtain funding from the banks. Thankfully there are a number of independent based finance companies that are able to provide funding against the strength of your orders and documentation. Therefore funding is potentially available for new start businesses, companies that have declined by their banks or businesses with less than positive trading performances. Providing there is value in the goods that you are buying a trade facility will be provided for you to import your widgets etc and providing the goods have been presold a factoring o  invoice discounting facility will dove tail and be used to repay the trade facility on delivery of your goods to your customer. Simple! Well in theory it is

Factoring and EFG funding

Thursday, March 18th, 2010

It is most commonly believed that the only way to obtain EFG funding is via the banks. On the basis that two high street banks have written nearly 80% of all EFG funding it is easy to understand why. However it is not commonly known that it is possible to obtain EFG funding on the back of a factoring or invoice financing agreement. This may prove very beneficial because the banks can be difficult to obtain funding even when the additional security of the EFG guarantee is available.

There is a misconception that because an EFG guarantee is available from the government  that funding will automatically be approved. This sadly is not the case. Any application for business finance via the banks  must firstly meet with that particular banks strict lending criteria. Providing that the application ticks all the boxes in terms of meeting the bank criteria and the only reason the bank can not  do it is because of lack of tangible security then this where the EFG loan guarantee scheme will kick in. So if the application is a basket case it wont get passed the first hurdle.

Therefore if your application for EFG funding has been unsuccessful via the banks it may be worth looking at efg funding via a factoring or invoice discounting facility. Independent factoring and invoice discounting companies tend to be more flexible than the banks so you have absolutely nothing to loose.

Switching Invoice discounting company

Thursday, February 25th, 2010

Contrary to popular belief switching factoring or invoice discounting companies is relatively straight forward.  However it is more difficult if the exiting funder doesn’t want want you to leave.  Under extreme circumstances the existing discounting company will have notice periods built into the terms of the deal which  they will require paying in full. As notice periods could be anything from a  month to six months a chunk of minimum payments can soon add up. However if the relationship has totally broken down the existing provider may be willing t0 reduce their fees and the new provider may be willing to contribute to the fees to ease the pain so to speak. In addition a minimum contract from one to three years is not unusual and this must also be taken into consideration.

How you will be dealt with depends on the existing provider. Many of the banks prefer to keep a very clean and straight forward portfolio and if you don’t meet the banks strict criteria they will be more likely to let you go without a fuss. They dont want to be seen hindering a business especially if it is one of our government owned institutions. One of the biggest enquiries at the moment is for businesses wanting to switch from bank owned factoring and invoice discounting comapnies to more flexible providers.

Once all parties have agreed to the move there is a code of conduct that exists between the two funders. The new finance company will set up their  own trust accounts and the existing funder will sweep any money coming to the old accounts and pay it across until your customers get to grips with the change of banking arrangements. Hopefully the small amount of pain will result in new found financial freedom and flexibility. So there!


XL Business Finance Ltd is a privately owned and independent business financing company with established links to many of the UK's leading finance houses. XL Business Finance provides a viable alternative to high street banks that lack the flexibility and imagination to provide a solution to most business users requirements. XL Business Finance can provide a full range of business financing solutions and we ensure a high level of customer service and pride ourselves on quick decisions. Our independent status will ensure any offer of funding and asset finance leasing is best suited to our customer’s needs.

XL Business Finance Limited are authorised and regulated by the Financial Conduct Authority FRN 718737).

XL Business Finance, Eaton Place Business Centre, 114 Washway Road, Sale, Cheshire M33 7RF UK.


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