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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.

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Invoice Discounting in the recovery

Friday, April 9th, 2010

As we have probably mentioned more businesses go bust coming out of a recession than actually in it ( so I have been told). This kind of makes sense. The banks are still being tight with the cash and as the recovery takes place you need more working capital. Therefore it is imperative that you get the right kind of working capital facilities in place to meet cash flow needs.

Get too far into the banks with an overdraft and you might find yourself in difficulty in switching to a more flexible working capital facility such as invoice discounting. Therefore if you think at any point in the future you may need some help with additional working capital you should seriously look at an invoice finance facility sooner rather than later. Invoice discounting or even factoring will release up to 85% of your unpaid invoices and will grow as your business expands. So long as your business has a good mix of customers you should be able to get funding to the maximum amount available.

Which invoice discounting company is best for your needs depends on the length of time your business has been trading, the level of profitability and the systems and procedures you have in place to monitor and chase your customers. It might be that a bank based invoice discounting company will provide you with the best deal in terms of costing but as we know the banks are not always the most flexible. XL Business Finance has over 10 years experience in helping businesses choose the right funding partner and we guarantee that we will add value to the proceedings.

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Invoice Discounting Definition

Thursday, April 1st, 2010

Invoice discounting can simply be described as the provision of finance against unpaid invoices. The finance provider will take security over the book debts of the business by registering a debenture over the business. Traditionally the invoice discounting company will release between 75-85% of unpaid invoices of up to a 90 day period. Invoice discounting is usually confidential in that your customers are unaware that you are discounting your invoices. This is different from factoring whereby your customers are aware that you are raising cash against your invoices.

The criteria for obtaining an invoice discounting facility is higher than a factoring facility and the decision of the invoice discounting facility will be influenced by

1. the business should be able to demonstrate that they are trading profitably and that there is a reasonable net worth. The last set of audited accounts and most recent management accounts will be required to evidence a profitable well run business.

2. the lender will pay particular attention to the quality and spread of your customers. Ideally no one customer should account for more than 20% of turnover. There are a number of invoice discounting companies providing single debtor invoice discounting however it depends on the risk of that particular customer and whether credit insurance is available.

3. you must be able to evidence that a good credit control system is in place and that the turnround of issuing an invoice to receiving payment is done in a timely manner.

4. In addition a good sales ledger must be in place, ideally be computerised and adequately kept up to date.

As we have previously mentioned not all invoice discounting companies are the same. Every lender has a sweet spot. A good invoice discounting broker will be able to recognise which finance company will best suit your particular requirements. The introduction will be based on the length of time the business has been trading profitability, spread of and quality of the debtor book and geographic location.

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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.

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Grants for Business Investment

Wednesday, March 3rd, 2010

If your business is planning to invest in capital assets (ie plant and machinery) and/or new staff for expansion, rationalisation or diversification then your business could be eligible for a grant. If the project is yet to start and the your business serves or plans to serve more than a local market than European Grant monies may be available. XL Business Finance has teamed up with a specialist firm of chartered accountants to provide a free assessment of your eligibility for a grant. The initial assessment is absolutely free and a fee is only payable on the successful draw down of a grant. No grant no fee!

The minimum grant available is £10k and provided that all other areas of funding have been exhausted then funding may be awarded for between 10-35% of the total project cost therefore other sources of business finance must be secured to prove that the project is financially viable.

Following an initial meeting and a draft a project proposal which is discussed with the funding body and we get feedback within 2/3 days as to whether or not the business is likely to be successful with a grant application. It is important that you use the best possible expertise and experience in making sure that the application is dealt with in the correct manner to obtain the best possible chance of success. It is possible to go though the process yourself however experience suggests that it is better leaving it to the experts. From start to finish the process should take no more than six weeks however a business left to their own devices may take as long as six months wasting time energy and money. Far better to take the money now pay someone to do it and avoid making a mistake which leaves your application worthless.

Any business which has applied for the ECFG funding and has been declined may find a greater chance of success with the possibility of a grant. XL business Finance has over 10 years experience in providing innovative funding solutions and this is just one of the many areas we may be able to add value to your business.

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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!

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Bank restricting my invoice discounting facility

Wednesday, February 24th, 2010

Ok, I know I keep harping on about the banks and potentially having too many eggs in one basket however we have recently come across a situation which shows the banks for what they truly are.

Approx 12 months we were approached by a engineering company with a turnover of approx £12m to help source a competitive invoice discounting facility. They were banking with a well known high street bank that shall also remain nameless. A commercial mortgage was in place with the same bank for approx £500k against a fairly recent valuation of £1.1m so plenty of security here thank you very much. We recommended a totally independent invoice discounting company so the bank wouldn’t have too much control. The cost via the independent would be appox £30k of service fee for running the facility compared with what the bank who were offering the facility at a loss leading £12k per annum. From a cost point of view a no brainer however if trading conditions were to take a turn for the worse this could leave the customer exposed to the mercy of the bank.

Now then 12 months down the line and because one of the group businesses have struggled the customer has been placed with the banks specialist care unit and as such is facing massively increased costs.

The service fee has been increased by 1%, the interest rate has been increased by 0.75% and a monthly management fee of £1200 per month for monitoring the business has been applied. In addition a one of fee of £10k is being charged to verify the management information and cash flow projections. All this adds up to a whopping additional £50k per annum. Ouch!

Although this business has a £100k overdraft facility they are currently running stock at £2.5m. Within in two weeks we expect to have the customer uplifted from the bank with a new invoice finance company complete with a revolving stocking finance loan providing the business with an additional £200k working capital even after paying off the bank overdraft!

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Invoice Discounting explained

Tuesday, February 16th, 2010

Invoice discounting is purely a means to be obtaining cash against your unpaid invoices. The facility can be provided on a confidential or disclosed basis. Normally the facility will pay up to 85% of any invoices your business raises. Credit is provided for up to 90 days however under certain circumstances there are a number of invoice discounting providers that will provide up to 120 days. Unlike a bank overdraft the level of funding is not restricted by the profitability length of time and credit worthiness of your business. The facility will grow with your business and as such it provides the ideal working capital facility.

Invoice discounting is different from factoring because all factoring facilities are provided on a disclosed basis and factoring also offers credit control. Invoice discounting is simply a meansof obtaining cash against your outstanding invoices however not all businesses will be eligible for a undisclosed facility. From the finance company’s point of view invoice discounting is a far more riskier facility. This is because the finance company has little control over your customers. It is a more trusting facility in that the customer will raise an invoice and on a weekly, daily or monthly basis copies of the invoices will be provided to the finance company and the finance company make available 85% of the invoices available as immediate cash. The finance company doesn’t check with your customers that you have raised the invoice. The remaining 15% of the invoice is paid to the customer as and when your customers settle your invoices. Obviously the finance company will deduct an amount for interest owing and a small amount for the service fee. The service fee is usually a percentage of the overall turnover.

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Invoice discounting for a phoenix company

Friday, February 5th, 2010

There are a vast number of businesses going through a prepacked administration process at the moment. These are commonly known as a phoenix company. Agree or disagree with the concept they are an option open to many struggling businesses and are widely being recommended by many insolvency practitioners. However obtaining invoice finance coming out of the other side might not be as straight forward as one might think. It is very unlikely that a bank will finance a phoenix company. There are a few independent finance companies that will finance a phoenix company however the majority will offer factoring or disclosed invoice discounting. There are only one or two finance companies offering confidential invoice finance facilities. Whether you are offered a confidential facility depends upon how you have conducted t your previous business. All factoring and invoice discounting will take a reference from any previous invoice finance company. In a nut shell if the old factoring or invoice discounting has managed to collect out the old debt you have a much greater chance of being offered a confidential facility. If however the old finance company has struggled to collect out the old debt then you have less chance of being offered a confidential facility.

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Protect your cash flow with invoice discounting

Tuesday, January 26th, 2010

News on the high street today is that we are finally out of the recession. This is great news however don’t expect the banks to suddenly ease up on their underwriting criteria. We believe that it will be many months possibly years before the banks get back to where we were before all this kicked off.

Hopefully we will see businesses once again seeing an increase in turnover and as a result more profitable times ahead. Any increase in turnover will undoubtedly see an increase in working capital requirement. Do you really want to rely on the bank overdraft to provide the necessary working capital for your business? I don’t think so. While a business is expanding invoice discounting will provide the perfect cash flow finance facility that will grow with your business.

XL Business Finance has been helping businesses for over 10 years with their invoice discounting and factoring needs. Both are forms of invoice financing that will release up to 85% of unpaid invoices immediately. Providing there are no added complications to your business factoring or invoice discounting facilities can be up and running in a couple of days.

Although an overall funding limit will be set against your business this is reviewed on a regular basis and will grow as your business expands. As and when your customers pay you typically in 90 days from the date of the invoice the proceeds are used to repay the initial 85% advance and the remaining 15% is paid back to your business less an interest payment and a service fee. Interest is charged at a percentage over base rate or Finance House Base Rate and the service fee can range from 0.2% of turnover to 2.5 % of turnover depending on the whether you are utilising factoring or invoice discounting.

Both products are excellent for a businesses cash flow and we can help you obtain the most appropriate funding product.

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