When is the last time you reviewed your invoice finance? Much like a mortgage, factoring facilities tend to stay in place for a long time after they have influentially been set up. This may make sense for a period of time, especially if you had the best terms available to start with and if your business and customers are the same as when the terms were set up, but it can be costly if left unchecked for too long.
At Charles Edwardson, we review our clients facilities regularly and do a full audit on any new clients and their existing arrangements to make sure the businesses hasn’t outgrown their IF facility. Clients have come to us when limits are not sufficient, payment processes are cumbersome and limits too restrictive. In most cases we are able to reduce the current costs associated with invoice financing, sometimes even by half. In fact, we are so confident that if we can’t offer you a significant saving, we wont charge any advice fees.
Why use invoice financing?
Invoice finance allows you to get paid quicker. Cash is King is still as relevant as it was when the term was first coined. The only difference now might be that it’s less likely to be physical cash but available funds held in a bank account. A business can have a great revenue projection, strong contracts and stacks of orders but without cash – or electronic payments – into it’s bank account, the business has no capital to fulfill any orders.
Business plans are made with the presumption that customers pay in full and on time. The reality is that this is not always the case. Surprisingly it is often be the biggest companies who are the slowest to pay leaving a gap between the business providing the agreed goods or services and the customer making payment. Invoice financing, or factoring, bridges this gap by paying the invoice upfront as soon as it’s due meaning no more long delays waiting for payment.
How does Invoice financing work?
The invoice finance provider and the business will come to an agreement on terms to include how much of the invoice the lender will advance and the cost of doing this. Typically you should expect to pay 10 – 20% per invoice for the finance and associated costs. Your IF provider pays you within once you have raised your invoice and waits for the customer to settle.
Read on for the specific process depending on if you use Invoice Discounting or Invoice Factoring.
Getting paid using Invoice Financing
Invoice Financing takes two forms – discounting or factoring. It can also be called Sales Financing and, or, Receivables financing. The different terms mean the same thing, being paid on your sales as soon as they are made rather than having to wait for customers to settle their invoice.
Invoice Discounting
The most common form of receivable financing is invoice discounting. Your business continues to manage all aspects of administration of the invoices such as the issuing of invoices and collection of payment. Typically an IF provider will take a look at your total debtors book and agree a credit limit based on the value of the book. This can be up to 90%.
Your business can then draw down on the credit limit up to 90% (or whatever your limit is) of the amount that is outstanding to your business at any one time.
Your customers will not know that you are using a third party to front to advance funds to you.
Getting paid using Invoice Factoring
When using Invoice Factoring, the IF provider will take control of the management of the debtors book. This means they will process your invoices and deal with your customer directly for payment. This can also be operated confidentially – in which case your customers will think they are dealing with your own accounting or payments team rather than a third party.
Once an invoice has been issued to your customer, the IF provider pays you up to 85% of the value of the invoice within 24 hours. When they receive full payment from your customer, your IF provider will pay the remaining 15% minus any fees and interest to you.
Factoring is most commonly used to improve cash flow but can also be a useful tool in outsourcing the credit control function of a business.
What is the cost of Invoice Finance?
The IF provider will charge a monthly fee for the facility plus interest for the amount outstanding at any time. There may also be administration charges linked to the running of your account. Invoice Discounting is a cost effective way of borrowing and is often a similar cost to that of running an overdraft.
Factoring can have higher charges if the provider assumes full credit control but this will be much cheaper than running your own credit control department or outsourcing the function elsewhere.
Another cost to consider is bad debt protection which makes sure your invoices are still paid even if your customer is unable to continue trading or experiences financial difficulty. This is normally compulsory and charged at around 1% of the value of the invoice.
What happens if my client doesn’t pay?
This depends on how the facility was set up. It may be set up on a recourse or non-recourse basis. The options are the same for either invoice discounting or invoice factoring.
A recourse facility means the amount owed to the IF provider at any one time stays with the business. If your customers do not pay, your business must find a way of paying back what has been advanced under your IF facility. This is where a Bad Debt Protection policy should kick in.
With a non-recourse facility the IF provider will take responsibility for chasing the customer for payment and assumes the bad debt risk. There is no recourse back to your business. Typically this is a more expensive option and can mean tighter restrictions on which customers you can use the finance for.
How is my facility secured?
Lenders will want to take a form of security, or charge, over the debtors book (monies owed to you by your customers) which means in the event of default, the lender has the right to recover any monies they are owed from the debtors book ahead of any other creditors. Some lenders may also need a Directors personal guarantee.
What’s the benefit of invoice finance or invoice factoring?
It’s gets you paid quickly and makes your cash flow easier to manage.
Factoring can provide an outsourced payment and collections service
Non-recourse financing means your business is not liable for customers unpaid debts
Will my business be eligible for invoice finance or invoice factoring?
A business needs to offer credit terms to it’s customers and it’s customers need to be businesses also to be eligible for invoice funding.
If you have strong clients then an invoice facility can work well for many businesses, including new starts or those that have had problems raising finance in the past. Most of the underwriting is against your clients, not your business as the lender is taking the risk against your customers ability to pay. This means you may be able to access the facility even if you haven’t been trading very long or have experienced some credit issues previously.
Can Charles Edwardson cut the cost of my existing invoice finance facility?
We are confident that Charles Edwardson can reduce the cost of your invoice financing by leveraging our expertise and great relationships with lenders to find you the best available terms on the market. On average, we reduce our clients IF charges by 40% or more. If we can’t create a substantial saving, we won’t charge a penny for our service.