Here we explore invoice finance and give you the key information you need to get the right deal for your business. This includes sections on what it is, how much it costs and even some insider tips on how to make sure you don’t chose the wrong provider.
1. Invoice Finance – what does it mean?
The term Invoice Finance means an advance of funds from a bank or specialist provider secured against invoices raised for products or services supplied.
2. How it works
This is best explained in an example:
ABC Limited has an invoice finance agreement with XYZ Finance. ABC raises an invoice to a trade client for £1,000 and sends this invoice to XYZ. Upon receipt of the invoice XYZ will immediately release an agreed amount of the invoice to ABC. This is typically in the region of 80%, so in this case the release of immediate funds to ABC would be £800. The percentage released will depend upon the financial strength and type of your business.
The customer pays the full amount of the invoice to XYZ in 45 days. XYZ then pay the balance (20% in this example) to ABC less their fees. There is more on fees in section 6 below.
3. What Invoice Finance products are available?
Factoring
Factoring is a full service form of invoice finance where the Factor provides finance against the whole sales ledger and manages the credit control function. The facility will in most cases be disclosed and your clients will therefore be aware that you are using factoring.
Invoice discounting
Invoice discounting releases cash against a company’s outstanding invoices in the same way as factoring but the company using the facility retains control of their sales ledger, and the collection of their debts. Agreements are usually provided on a confidential basis such that clients are not aware their supplier is using this type of funding.
Other invoice finance products include:
Non-recourse invoice finance, where the debt is insured
Selective invoice finance, where you only fund a section of the sales ledger
Export invoice finance, where your customers are based overseas
Single invoice finance, where you fund an individual invoice
Reverse factoring, where your debtor instigates and then plays a role in the facility
Supply chain finance, where the invoice finance facility is often linked to a trade finance facility
4. Who are the providers?
There are a wide range of providers from the largest banks with a global reach to small independent factors with less than 100 clients. All have their own strengths and weaknesses in terms of products, service, geographic coverage, pricing and their own availability of funding.
5. How much does it cost?
There are two basic costs of an invoice finance facility:
Firstly, there is a service charge, which is the fee paid by the client for the provision of the service. This is obviously higher for factoring facilities, where the provider is in effect running the whole of your sales ledger including collections, and lower for invoice discounting where the workload is lower. Typical fees in the market at this time are in the region of 0.8% to 2.00% for factoring, and 0.3% to 0.75% for invoice discounting.
The second charge is the discount fee and this is the cost of the money that is being advance by the provider for the time it is outstanding. Typical fees in the market at this time are in the region of 3.00% to 5.00% over base rate or LIBOR for factoring, and 2.25% to 3.00% over base rate or LIBOR for invoice discounting. (Note: The banks tend to use base rate and the independents LIBOR.)
In addition there are disbursements charged for additional services used.
6. How do you get it?
Research the market. We would always advise you speak to an expert who has intimate knowledge of all the providers in the market place and their capabilities, and can do this research for you in a fraction of the time. Whether you use an advisor or not always aim to see at least two potential providers. Be aware that when you are meeting the provider at your office, this will be one of the Business Development team and NOT the person you will be working with on an on-going basis.
7. Six invaluable “insider tips”
- Make sure you have the right provider for your needs.
- Don’t commit to a long contract if you don’t have to.
- Check out which services are included and which aren’t. Remember you will be charged a disbursement fee for everything that is not standard.
- Get everything confirmed in writing or in an email.
- MOST IMPORTANT – go to the office of the proposed provider and meet the person who will be running your account after you have signed on the dotted line. If you don’t feel comfortable with this person or the set up – don’t sign the agreeement.
If you would like to know more about Invoice Finance and/or the continuing lack of availability of funding is affecting your business, please contact us either by email at john.thompson@transcapital.co.uk or on 0845 689 8750. We are specialists in this field and will be able to help.