What is Factoring?
Invoice Factoring is an extremely simple way of funding the growth of your business by accessing up to 90% of the value of your approved sales ledger. You simply upload your invoices to the Invoice Finance provider when all of the works have been complete. Most financiers have a web based system allowing you to access it securely and input the details from the invoices. This is a quick and easy to use method and can be extremely supportive to businesses that don’t have an in house finance clerk as the financier will offer credit management and collections.
Why use factoring?
- Fast method of funding the business using the debtor book as the primary security
- Gain support with sales ledger and collection management
- Cost effective way of funding the growth of the business
- Flexibility over both overdraft and loan as the Invoice Factoring line grows with sales
- Access to funds usually within 24 hours
- Up to 90% of the approved invoice values made available within 24 hours
- Fast reinvestment of funds, turning the cash cycle of the business more quickly relieving the pressure from having to wait for customer payment terms to be met
- Excellent for start-up businesses with minimal capital or to support growth
- Spend more time focusing on business generation rather than chasing debts
- Increased cash flow can assist bulk purchasing possibly generating higher supplier discount
Does my business meet the criteria for Factoring?
- Must be Business to Business trading only - Any general public sales will be excluded
- No minimum Turnover required– Support will be offered to both new start and established businesses
- No requirement to have an in house finance department or operate a financial accounting package
- No requirement to have credit control clerk as the financier will be able to offer assistance
- Simply have the ability to complete works or provide service within accordance of the purchase order and then raise an invoice for payment
How does Factoring work?
The Invoice Discounting provider will agree to purchase all business to business invoices and to release an agreed value, generally up to 90% of
the approved invoice value to you usually within a 24 hour period.
- Complete the works or services as per the customer's Purchase Order.
- Gain some form of evidence that the works have been complete in accordance of the purchase order. This can be either via email or a signed collection/delivery note etc.,
- Raise the invoice for payment, ensuring the payment terms and payment account details are clearly visible
- Upload a copy of your sales ledger to the Invoice Discounter
- The Invoices will then be assessed with regards to the credibility of the customer ensuring that they have the appropriate funding limit
- Once the assessment has been complete the agreed percentage of funds will be released to an account known as a Trust Account, this will be accessible online allowing you to draw down funds as required by your business at that time
The Support Process
- The Invoice Factoring Provider will raise statements on a monthly basis and send them directly to the customers on your behalf
- hey can manage the collection of invoices via letter or phone calls, this is handled sensitively and professionally on your behalf
- Collections will be agreed with Company Directors ensuring customer relations are not damaged
- Once the payment is received from your customer, the invoice will be marked off as paid and the remaining balance of the invoice is credited into the Trust Account less the Invoice factoring provider’s charges
What Security would be required?
As a general rule the following would be required:
- An All Asset Debenture to be registered at Companies House (some funders may only take a specific charge over the debtor book, although this is unusual)
- A Personal Guarantee (generally capped at a percentage of the funding limit)
- Fraud only warranties maybe considered by the financier in place of a personal guarantee but this is usually only offered to company that has high retained profits in the background to support any risk
As a general rule the following would not be required:
- A charge over a tangible asset (such as a Director's home or Business Premises)
It’s important to understand that the debtor book is the primary security hence the importance held behind ensuring the debt is collectable
through a solid audit trail evidencing strong sign off / acceptance that the work has been complete. It may be seen as a hindrance to get someone
to sign off a job sheet on a construction site on a Friday but you must remember memories soon fade and it’s sometimes very difficult to prove
later on down the line that you had completed the works to the customer’s acceptable standard.
It’s in this situation that the debt can become uncollectable and then lays question to should the financier risk funding you any further. The
financier would prefer to have a successful business where the relationship is mutually profitable rather than be placed into a position where it
had to call upon a guarantee as it was unable to collect the debt from the customer base due to a lack of provability.