iQep: Insurance & Finance

Invoice factoring, selling your company’s invoices at a discounted rate, is an under used method of ensuring a steady cashflow. First developed thousands of years ago, factoring, as it is generally known, is a guilty secret seldom discussed as a business option and not covered in college course work. It is mainly targeted at businesses that supply other companies rather than the retail market.

In the current, difficult economic environment, with businesses searching for any means possible to stay afloat, factoring is becoming increasingly popular. As more and more companies come to recognise that a dependable, predictable income stream might be their lifeline, financial institutions involved in factoring have increased in number. As demand for invoice factoring grows, the competition between factoring companies has also increased ad there are now a variety of factoring options available.

In addition to invoice factoring, where a company sells its invoices and all responsibility for the collection of monies due, there is also invoice discounting. With invoice discounting, the company retains responsibility for its own credit control rather than entrusting their customers to the factoring company. This of course takes away part of the advantage factoring carries, but allows for maintaining a close customer relationship. A few factoring companies allow their clients to have some customers whose accounts they handle themselves, while the lender assumes collection responsibilities for the rest.

Ultimately, if the institution that buys the invoices is unable to collect an outstanding debt the original owner is libel and will have to pay back any money paid in advance; however, there is a measure to ensure against this possibility. A non-recourse option is available, which is essentially an insurance policy against bad debt.

Deciding whether factoring is the right choice for your business can be difficult enough, but deciding on which company to deal with can be just as daunting. Companies such as Touch financial factoring are there to lay out all the options and explain the pros and cons.

A factor is the name given to a company that, in effect, buys invoices from businesses.  The process is called invoice factoring and it involves the borrowing of money against an unpaid invoice.  The factor will typically pay a percentage of the total sum of the invoice to the business that provided it, and then procure payments on its behalf, in order to pay off the debt.

This method of releasing money is often more favourable than waiting for a client to pay an invoice, as that can often be a long process.  This short term borrowing releases funds within 24 hours, meaning they can be injected almost instantly back into the business and therefore can improve cash flow.  As well as helping to keep a business afloat, it can also aid in further expansion.

Invoice factoring is also a helpful system to be employed by smaller businesses.  A small business may not have the resources for a separate credit control department, meaning that chasing an unpaid sales invoice becomes a difficult task.  A factor can do all of this, communicating with the client directly, and therefore cutting administration costs to the business employing its services.

This method of releasing funds is frequently preferable to taking out a business loan or overdraft.  It is often easier to arrange and the benefits that come with it are also far more advantageous to a business.

Reverse factoring, which is also known as supplier finance, is generally aimed at larger organisations that have several suppliers that need to be paid regularly and quickly.  It is a low cost finance scheme and in essence, a factor or lender puts in place a flexible system for settling related accounts using invoice finance.

When a supplier produces an invoice for which they require early payment it is first approved by the company they supply and the invoice, less the fee payable, is then settled by the factor, ahead of time.  The business then repays the factor.

The supplier benefits from prompt payment of the invoice, which costs only a small fee that is deducted from the total invoice value.  The business benefits from the support of the factor until such time as it is in a position to repay the value of the amount advanced.  The company also benefits from being able to support its suppliers, keeping the supply chain secure and stable.

Effectively, reverse factoring is a low cost version of invoice finance and a low risk way of obtaining finance.

If you have ever started your own company, you will know that a growing business can become a cash-devouring monster. This may sound strange to the uninitiated, but it is true, a growing business needs money for new tools and machinery, stock and advertising. To become established you might have to provide your debtors with favourable payment options, while suppliers may not be willing to grant you more than 30 days grace, because a new or recently formed company does not have any credit record.

You could, of course, approach a bank, but they usually require collateral for loans and their application procedures are cumbersome and time consuming. If you need cash fast, invoice finance is often the only solution.

The approval process is quick and uncomplicated; all you have to do is prove that you have debtors who owe you a certain amount of money. The invoice finance company will probably visit your business premises to familiarise themselves with the way your company operates and to study the payment history of your customers.

Once your application has been approved, the money can be in your bank account within a day or two. The invoice finance company will then usually take over the collection of your debts and deduct whatever you owe them, before paying the balance.

Every time you produce a batch of new sales invoices, you forward it to the invoice finance company and they will give you a further cash advance. Therefore, the more you sell, the more cash you have to finance your business operations. This solution makes invoice finance ideal for a growing company.

Just keep in mind that if your customers do not pay their accounts on time, you will be liable for the money due, since the factoring company has already given you a cash advance. However, if you opt to go down the non-recourse invoice financing route, the factor bears the risk of any unpaid debts.

There are various different types of company that offer invoice factoring.  Some are independent but major banks and other large financial institutions also supply factoring services.

Touch Financial is the largest invoice finance broker in the UK.  Using a broker such as Touch Financial when choosing a factoring company can help with the potentially daunting task of selecting the most appropriate factor for the needs and circumstances of the business concerned.

If a business approaches its own bank for factoring advice, it is likely to be offered the services supplied through the bank, rather than be referred to an independent company.  However, because the services offered by alternative companies differ, it is useful to shop around and compare what is available. 

The charges of different companies will often vary and different charging structures might be more suited to one business than another.  For example, a business with a consistently high sales turnover might look for a different deal to one that is still in the process of building up sales.

It is therefore advisable to either use a broker to compare suppliers or ensure that several are considered before a choice is made between the various factoring companies available.

Invoice factoring is a way in which businesses can release funds against outstanding sales invoices.  Companies such as Touch Financial factoring can help secure a factoring arrangement to improve cash flow for businesses trading on credit terms.

First of all, the chosen factor will want to carry out an assessment of the business, either electronically or by visiting in person.  The financial situation of the business will be assessed as well as future business plans. 

Once an agreement is reached and signed, the factor will agree to advance a fixed sum, usually in the region of 80% to 90% of approved invoices.  The payment will normally be received within a 24 hour period, meaning the business can make use of the money advanced almost straight away.

The factoring company is then responsible for obtaining payment from the customers whose invoices it has taken on.  When subsequent invoices are raised, an instruction should be given to pay the factor directly and a copy sent to the factor.  The factor will advance the agreed percentage of these invoices to the business on an ongoing basis and proceed to collect payment from the customer, issuing statements and operating credit control procedures where necessary.

When an invoice is paid to the factor, the balance of the remaining 10% to 20% of the invoice is then passed to the business, less the factor’s charges, which are usually deducted on a monthly basis.  When invoices are not paid, the way in which debts are settled will depend on the type of agreement that was originally made between the business and the factor.

As there are many different factoring companies available with differing services and charging structures, it can be useful to arrange a factoring service through a broker such as Touch Financial factoring so that the various options can be explored.

Recourse factoring is a type of invoice factoring.  The alternative type of invoice factoring is non-recourse factoring.

Recourse factoring is when the factoring company does not take on the risk of bad debts from the business using its service.  In practice, this means that if a customer does not settle an invoice, the factor will be able to reclaim from the business any money it has advanced against that invoice.  The factoring agreement put in place at the outset will set out how many days after the payment was due the business has to refund the money that was advanced.

Fees and interest on the money advanced will still be payable, even if the money has to be returned because the invoice is unpaid.  However, the fees will be lower in general if recourse factoring is chosen rather than non-recourse factoring.  There might also be fewer requirements placed on the business in relation to its systems and customers.  This is because the business is still accepting the risk of its own bad debt rather than passing it on to the factoring company.

Factors are not a collective hive where one agent is interchangeable with another. Instead, businesses can find them throughout the financial sector. Some are independent agents while others work for a branch of a major bank or the subsidiary of a financial institution.

Because of the great variety of factors it is a smart business policy to approach more than one factor before making a final decision. For a list of factors, contact the Asset Based Finance Administration (ABFA). Their comprehensive listing details factoring cost services offered and turnover requirements.

Some factors will negotiate on behalf of a company without charging a fee since the factoring company pays their commission. Reputable factors allow their other clients to be contacted for reference purposes and to answer questions about their general reputation.

Talk to other companies and businesses in the same industry. Word of mouth recommendations can lead to the right factor in a certain business sector, such as automotive parts, where the factor is schooled in factoring costs of the industry.

A factor’s reputation is based on their ability to collect debts quickly and efficiently, handle disputes and queries in a professional manner, interact with the company’s employees, have experience in the field of endeavour and demonstrate skilled communication with a company’s clients.

Lastly, before entering into an agreement with a factor, discuss the period of notice required for termination of services, the length of the service agreement and any other salient information before engaging their services.