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Invoice discounting or factoring ?

Tuesday, November 17th, 2009

Invoice discounting are two completely different funding products. Although most finance companies will offer both facilities not all finance companies are great at doing both. Altough both funding products will release cash against unpaid invoices and potentially give you the financial freedom to grow or develop or indeed just survive in the current economic climate. Factoring is traditionally provided with full credit control  whereas invoice discounting is provided on a confidential basis.

Factoring can be provided for businesses with turnover as little as £80,000. In order to be eligible for invoice discounting turnover will need to be at least £250k. Up until a few years ago unless your business had turnover of at least £1.0m then there would be absolutely no chance of obtaining an invoice discounting facility. However when different finance companies were vying for business in the good old days before the credit crunch this minimum turnover became lower and lower.

Invoice discounting is provided on a confidential basis which means your customers are unaware that the finance company is providing funding against yourinvoices. Therefore from the funders point of view the facility is more risky than factoring as potentially the facility is more open to abuse in terms of fraud and raising fictitious invoices. Therefore a business must be profitable ,long established  and have well established credit control procedures in order to qualify for invoice discounting.

Factoring is always provided on a disclosed basis and your customers will be aware that the finance company is providing funding against your invoices. More often than not the factoring company will provide a full credit control service. Therefore the finance company has a much greater grasp and control on your finances and as such they are happy to provide funding for new start businesses , businesses which are loss making and businesses which have a relatively small turnover.

Why a business should use invoice financing

Saturday, November 14th, 2009

Invoice Financing can take place in many forms and variations however in a nut shell it gives a business the ability to release cash against unpaid invoice. Historically it was used as a lend of  last resort, however over the last few years the market has matured and the stigma of using a cash flow facility seems just about to have disappeared. In fact we can give you many reasons as to why invoice discounting or factoring  is far better than many traditional forms of bank finance.

Up until the last few years many businesses would use their overdraft to fund their working capital requirements. However as credit terms have been continually stretched many business have found it difficult to operate within agreed limits. Traditionally an overdraft facility has been set against the trading performance of the business and the amount obtainable will more often than not have been restricted by the ability of the business to provide tangible security in the form of bricks and mortar

Invoice financing is totally secured against the unpaid invoices which are assigned to the particular finance company.  Unless an overpayment is required no other security is required. The great advantage is that the facility will grow with the business. More importantly providing the business is trading within the terms of the agreement there is no risk of the facility being withdrawn. This is not the case with a traditional bank overdraft which is payable on demand. We have seen many instances recently whereby   the banks have withdrawn the facilities with absolutely no notice resulting in very difficult cash flow problems for the business. our advice is always go for a cash flow facility rather than the overdraft.

Which is the best invoice discounting company

Friday, November 13th, 2009

A question that we get asked most regularly. The simple answer is that it depends on the particular needs of each customer.    It also depends on the length of time the business has been trading , is it profitable and the quantity and quality of the ledger. If it is a very clean ledger ( or debtor book ) in that it is not difficult to collect payments then in theory there should be many finance companies to choose from.

However you must take into account other considerations. Certain finance companies are very good at servicing certain debt.  There is only one high street bank that is any good with foreign and international debt and there is only one bank based invoice discounting company that is any good at financing contractual debt. And guess what they are two completely different banks. Some banks are also good at offering built in credit insurance and others can be difficult when it comes to setting funding limits. Most banks and independent factoring company are fairly similar when it comes to pricing however the cheapest deal isn’t always the best.

A customer quoted to us recently that he wished he had chosen a high street invoice discounting company but rather that he he had had gone with a independent finnace company that traditionally could be more flexible and thus providing more cash against his invoices.

Lloyds bank restricting my invoice discounting facility

Thursday, November 12th, 2009

Hardly no surprises that any business currently using a factoring or invoice discounting facility with LLoyds bank may be having their credit lines severely restricted. XL Business Finance has seen three customers this week all wishing to move from LLoyds due to a restriction in cash availability. On Tuesday this week LLoyds bank announced the loss of 4500 jobs some of which will go in the collections department. We are unclear if itis from their cash flow arm LLoyds TSB Commercial Finance however the bank is obviously under pressure and as such we are starting to see businesses being affected by their noncommercial view.

Traditionally it can quite a long winded affair switching invoice discounting or factoring companies especially as many finnace companies will tie in their customers for a least a year and will require to provide 3 months notice if they wish to switch funder.  Sometimes it  my be possibel to buy one elf out of a deal with the support of a new finance company however even then it might be a  costly exercise. The good news is that many of LLoys customers have been signed up to a short one month notice contract and it is these customers that we are seeing take advantage of their ability to switch finance company. If in doubt we can check any documentation on your behalf and give you some advice from an independent view point.

Improve cashflow with Invoice Finance

Wednesday, November 11th, 2009

Invoice Finance is suitable for businesses that supply goods and service to other businesses and provide them with  with credit terms for payment. This form of cash flow finance will provide a business with up to 95% of their unpaid invoices immediately with the remainder payable to the business when your customer settles the invoice. Once upon a time Invoice Finance was deemed to be a finance product of last resort however it is fast becoming the number one choice finance product for managing a businesses cash flow.

There are various forms of funding  available however most  are a variation of the sane product. Invoice discounting , invoice finance and invoice factoring are  all basically the same products providing cash against unpaid invoices. Banks have traditionally offered  overdrafts as a working capital facility however they do not have the same flexibility and adaptability. Invoice Finance will grow with your business as the factoring companies have a close control and therefore a better understanding of the invoices you are raising. The facility grows as you grow your business.  An overdraft is traditionally agreed on the performance of the business and is often restricted by additional available security such as bricks and mortar. At some point most banks will try and force a business down the factoring or invoice discounting route however there are many independent alternatives possibly provide more funding and a much better service.

Invoice Discounting

Thursday, November 5th, 2009

Invoice discounting is a form of invoice finance providing the financial freedom to grow your business. This form of discounting is usually provided on a confidential basis meaning your customers are unaware that you are using a invoice discounting  company. As such the invoice discounting provides a flexible form of finance enabling a business to release 90% of their unpaid invoices. Recently XL Business Finance has been advising a number of business with turnover in excess of 20m that have been disillusioned with inflexible high street  banking institutions. The good news is that there are a number of specialist lesser known banks specialising in businesses with larger turnover. There are not many institutions capable of handling such large corporate businesses but we have the expertise to matchyou with the most suitable funder.

XL Business Finance regularly introduce invoice discounting to two or three finance companies some of which are foreign owned. These  funders  have been established with the sole purpose of specialising in the UK invoice discounting market. I guarantee you probably haven’t heard of these finance companies however their personnel are of he highest quality and have the ability to structure the most complex of deals. All of our customers have been highly impressed with our recommendations.

Invoice Discounting

Monday, October 19th, 2009

Invoice discounting is simply the means of raising cash against unpaid invoices. Choosing the right finance company can provide the financial freedom to grow the business or  in these difficult times it can implybe the difference between survival and failure. Not all invoice discounting companies are the same and it is important to choose the best finance company for your particular requirements.

Bank owned invoice discounting companies are very good at looking after their own customers providing the business is financially strong. If there is a strong bank connection with other facilities such as commercial mortgages and /or overdraft facilities the banks will bend over back wards to ensure they get the business.  It is still possible to get some very cheap invoice discounting deals on this basis. Be  beware that if you expose your business too much to one  financial institution you might be storing up trouble for the future. No one could foresee the creditt crunch however in hind sight it easy to say we should have seen what was coming. It is exactly the same with finance facilities. Let the bank have too much control and if things turn for the worse any business with too much financial exposure to one bank may find themselves in difficulties.

An independent invoice discounting company will ensure that any risk is spread across a number of finance companies and that you don’t have too many eggs in one basket. There are plenty of invoice discounting companies glad to take on the invoice discounting  on a stand alone basis and they wont be interested in taking over the core banking.  However if you do choose to use a third party factoring company it is worth checking if the bank isrelying on the debtors for security on any of their facilities. If the business has an overdraft it may be possible the bank have registered a debenture against the business. Therefore if you are to switch to an invoice discounting facility any overdraft maybe withdrawn and this must be taken into consideration with choosing a provider.

Trade Finance

Monday, September 28th, 2009

Trade Finance provides customers the ability to import goods either from the UK or domestically. If the facility is provided in conjunction with an invoice discounting facility a complete funding solution is provided from start to finish.

For example if a business is importing television sets from China a trade facility would provide a facility to import the goods. Providing the televisions had been pre sold it is possible to get 100% funding.  The trade facility would be repaid when the goods are imported and sold in the UK and an invoice is raised to the UK purchaser. When the invoice is raised to the UK buyer  either an invoice discounting or factoring facility  will repay the trade facility. It can be seen the trade facility and the invoice discounting facility dove tail nicely together to provide a total funding solution.

This type of trade facility is more likely to be provided by an independent invoice discounting company that will take a more flexible and commercial view. Therefore as long as the end purchaser in the UK is verified an reliable the funders know there exit route and as such will be more likely to fund new start businesses, poorly trading businesses and businesses unable to raise finance by their own banks.

Cash is King

Thursday, September 24th, 2009

Indeed it is. The biggest problem our customers are having at the moment is inflexible factoring or invoice discounting companies, unsupportive banks and collecting cash. These all combined together can potentially have disastrous consequences for any business.  However with some careful planning any potential  cash flow problems can certainly be minimised.

Firstly if there is to be any capital expenditure, where possible this should be purchased via a hire purchase or finance lease facility. In addition it is always advisable to use a third party finance company. If you use your own bank you are potentially utilising finance lines which may be required for non asset investments. Never never buy assets for cash even if cash flow is sufficient. If there is an increase in working capital requirement the cash will be required for cash flow. Also it is so much harder to organise fiance a few months down the line. Finance companies will view this as  refinancing existing equipment exercise, there are far less funders and rates will be much higher.

It also wise to choose your invoice discounting or factoring company wisely I was with one customer this week who regretted going with a main bank. He wished he had gone for the slightly more expensive independent as he would have been certain to have had more cash. In retrospect hindsight is a wonderful thing!

Invoice Discounting

Friday, September 18th, 2009

Although invoice discounting is a great means of freeing up cash against unpaid invoices it is becoming increasingly more difficult to secure an confidential invoice discounting facility. Once upon a time a business had to have been trading for at least 3 years , have at least a £1.0m turnover and have a very strong balance sheet.

In the good old days when there was plenty of cash swilling around the system  all the finance companies were competing with each other for business and it is fair to say that the usual criteria for confidential invoice discounting were relaxed somewhat.  New start businesses, phoenix businesses and  businesses with far from strong trading performances were being offered facilities.

Invoice discounting and in particular confidential invoice discounting is susceptible to fraud and in these difficult times finance companies are reverting back to the more stringent criteria for invoice discounting. Therefore if a business is financially weak, turnover is below a certain level or even credit control systems are weak it is more likely that a business will pushed down the factoring route.

If the business doesn’t quite meet the criteria for confidential invoice discounting it maybe possible to organise a disclosed facility whereby the customer is is responsible for their own credit control. Which ever way you decide to o it is worth shopping around as different finance companies have different criteria. Even better get a decent independent finance broker to do all the hard work.


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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