INVOICE FINANCING
Why use invoice financing? Gearing borrowing requirements to the level of invoices generated has become a common and acceptable method of generating working capital, far removed from the days when factoring was commonly referred to as ‘last resort financing’. Unlike overdraft facilities, that are usually set on the basis of previous years achievements, sales related forms of financing provide funds that are immediately proportionate to the level of sales. What sorts of situations can it help with? This suits companies that are experiencing a rapid growth pattern or companies that are presented with business opportunities that might otherwise have to be turned down due to lack of financial resources. What options are there available? The two principal forms of sales related financing are Factoring and Invoice Discounting. Factoring is usually provided on a disclosed basis i.e. your customer gets to know that a factoring company is involved, whilst Invoice Discounting provides funds on a non-disclosed off balance sheet basis. What are the main characteristics of factoring? This facility operates on either a full recourse or non-recourse basis, the latter facility providing an in-built credit insurance scheme that means if the customer doesn’t pay, usually because of insolvency, then the factoring company stands the knock. It is often argued, however, that the credit insurance facility offered by factoring companies is more restrictive than that offered by the credit insurance companies. It is pointless taking a non-recourse factoring facility purely to take advantage of the credit insurance element. The prime function of factoring is to provide working capital with the additional benefit of being able to outsource some of your credit control function. This leaves you more time to concentrate on generating sales whilst leaving the factoring company to see that invoices are paid within a reasonable period of time. How does factoring work? Copies of invoices are despatched to the factoring company and funds amounting to 80% to 85% of the invoice values are made immediately available. The balance less charges is paid when customers pay the factoring company and it becomes the factoring company’s task to ensure that customers pay according to terms. The faster a customer pays, the lower the amount of borrowings which naturally means lower interest charges. What costs are involved? There will normally be a service charge expressed as a percentage of turnover for the credit control service and if required, a percentage to cover bad debt protection i.e. Credit Insurance. The percentage service charge is set according to the workload that needs to be undertaken e.g. volume and value of sales invoices to be handled, the number of customers that are likely to need chasing every month and the level of credit notes etc. The service charge element typically fits in a range between 0.75% and 2.5% of turnover, usually the higher the turnover the lower the percentage. The other cost involved is the cost of the finance provided in advance of the money being collected from the customer, there is usually a discount charge calculated on day to day usage of funds. The cost of these funds is likely to be comparable with normal secured bank overdraft rates. What type of company uses Invoice Discounting? Invoice Discounting is usually restricted to companies that have a strong balance sheet and a good track record, in general, the more established concerns. The type of concern that already practices sound credit management and has the necessary staff and systems to ensure efficient customer collections but nevertheless cannot bring cash in quick enough to service working capital requirements How does Invoice Discounting work? Immediate cash is made available against approved invoices, typically between 80% and 85% but the responsibility for the sales ledger operation remains with the client and the service is normally undisclosed to customers. As payments are received they are paid into a bank account administered by the Discounter, after which, the client receives the balance less charges. What if a customer goes bust? If a customer goes bust or doesn’t pay for any reason then it is down to the client company to stand the loss, however, there is no reason why a credit insurance policy cannot be taken to run in conjunction with the facility. What does it cost? Charges are made up of an administration charge, which might be a flat monthly fee, or percentage of turnover and a discount charge for the finance provided in advance of collections. The administration charge covers the cost of regular on-site auditing as well as the day to day administration of the facility whilst the discount charge is calculated on day to day usage of funds. This is likely to be comparable to normal secured bank overdraft rates. How can Factoring-Accounts-Receivables help? Factoring-Accounts-Receivables staff have for many years worked closely with the Factoring and Invoice Discounting marketplace and have an in-depth knowledge of its workings. We will be pleased to offer our help and guidance in finding the best possible facility to fit with your own particular needs. Just complete the brief proposal form and we will come back with our suggestions and hopefully an indication of likely costs. What do Factoring-Accounts-Receivables get out of it? Using sales related forms of financing does not excuse good credit control practices and we hope that having established a contact with us you will use our services in the future via the various credit information links available on this web site. We do not take any fees from you and you are under no obligation. Are Factoring-Accounts-Receivables able to assist with other funding solutions? Yes, we can also assist with Stock Finance and Export Factoring solutions if you would care to outline your specific needs on an e-mail to us. |
ACCOUNTS RECEIVABLE PURCHASING FACTORING QUESTIONS AND ANSWERS DEBITOR-IN-POSESSION FINANCING
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