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Archive for the ‘Invoice Discounting’ Category

An Overview of Invoice Discounting

09 Jul

Invoice discounting is one of many forms of invoice finance.  Invoice discounting enables a company to gain funding via unpaid invoices.  This eliminates the requirement for a company to wait for payment by a customer.

Invoice discounting is used to improve cash flow.  It provides businesses with the opportunity to protect against bad debt and unlock money tied up in unpaid invoices. 

With invoice discounting, a business normally raises invoices to their customers on company stationery.  The invoices are then sent to both the customer and the invoice discounting company.  Between 75-85% of the value on an invoice may be released by the discounting company on receipt of the invoice. 

The business remains responsible for the collection of payment and credit control with invoice discounting, however this is not the case with invoice factoring.

Once a customer has paid an outstanding invoice, the discounting company requires a business to pay the outstanding balance for the invoice.  A business is therefore required to provide money back to the invoice discounting company.  Once the discounting company has received payment, it will send the full balance owed, minus a fee.  The balance owed is typically between 15-25% percent of the value the invoice not financed.

Invoice discounting is suited to businesses that already practice sound credit management.  This method of financing is offered to businesses with annual turnovers exceeding £500,000.  Unlike a bank overdraft, invoice discounting is a flexible facility that has the potential to grow with a business and it is amongst the fastest growing forms of commercial finance available.

 
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Invoice Factoring vs. Invoice Discounting

28 Jun

Invoice factoring and invoice discounting both offer businesses the chance to acquire fast cash by selling unpaid invoices to a third party, typically a finance company. 

Invoice factoring, also known as asset securitisation, refers to the outright sale of unpaid invoices to invoice factoring companies.  A business receives money and the finance company seeks to recoup the cost of the invoice.  The finance company also receives interest and a handling fee.

Invoice factoring is advantageous as it reduces the amount of resources required for invoice collection.  Invoice factoring offloads the hassle of collecting payment onto the finance company. 

Invoice factoring companies are likely to contact a business’ customers to chase up payment for invoices.  This means that a customer will be aware that a business is using factoring services.

Invoice discounting, like invoice factoring, refers to the sale of receivables.  However, unlike with invoice factoring, invoice discounting companies are not responsible for collecting unpaid invoices. 

Invoice discounting is ideal for those with adequate finance departments as payments are chased up by a business, not an invoice discounting company.  As a result, invoice discounting does not disturb a business’ existing data collection techniques.

Invoice discounting is entirely confidential.  This means that customers of a business using such a service remain ignorant to the process being used to collect invoices.

Invoice discounting is typically associated with lower handling fees and interest rates and it is for this reason that invoice discounting will return more cash to a business. 

 
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Types of Invoice Financing – Understanding the Terminology

13 May

There are a number of different types of invoice financing arrangements available, and understanding the terminology involved is important.  Finding the right deal for your business will mean you are in a better position to negotiate an arrangement once you have identified a suitable invoice financing company for your type of business.

•    Invoice Factoring – Invoice factoring is where a factoring company – usually a bank or other financial institution – advances cash against the value of an outstanding invoice to a business.

•    Recourse Factoring – This is where a business uses a factoring company to manage their invoices and lend them a significant percentage of the outstanding invoice, but the factoring company takes no responsibility for the debt.  So, should a debtor fail to pay, the responsibility for the outstanding debt remains with the business, not the invoice financing company.

•    Non-recourse Factoring – In this type of arrangement, the invoice financing company takes responsibility for the debt as well as paying the business for the outstanding invoice.  In this instance, the business entirely outsources accounts department responsibilities to the invoice financing company, and they are responsible for the collection of the debt.

•    Invoice Discounting – Invoice discounting allows a company to access funds over a number of invoices without incurring the costs involved in invoice financing.  The business hands over a bulk of invoices and they receive a percentage of the value of the invoices from the invoice discounter.  They retain responsibility for the outstanding debt, and the discounter takes no responsibility for chasing unpaid invoices.

 
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Invoice Finance – can it help my business?

07 May

Cash flow or working capital can often be a problem for small or growing businesses.  When a business is expanding rapidly its requirement for cash to pay for more supplies can become acute.  Unfortunately, a business cannot rely on its customers to pay promptly during this period and thus there is a need for alternative financing.  Invoice finance is a way for businesses to bridge the gap between the issuing of an invoice and the payment of the invoice.

Invoice finance helps businesses by improving their cash flow and smoothing out the highs and lows that are typically seen.  This makes managing their cash much easier for businesses.

Invoices may not be the first asset that businesses consider when trying to arrange funding but in fact, invoices are a very flexible asset.  With invoice financing businesses are able to receive their payments upfront and their money is no longer tied up in unpaid invoices.  Usually a business will receive payments of around 80 to 85 per cent of the value of their invoices.  The remainder of the money is paid to the business when the invoice is finally paid.  The business will not receive the full value of the invoice, as a fee has to be paid to the company who provides the finance.

Invoice financing is advantageous to a business because it receives its cash almost immediately and no longer has to wait for customers to pay.  Late payment, particularly in certain sectors of industry, can be a serious problem for small businesses.

There are two basic products that come under invoice financing, Invoice Discounting and Factoring.

 
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The Cost of Factoring and Discounting

07 Apr

Many business owners simply do not think about invoice discounting or factoring because they think the cost is too high.  Though you may find a few invoice discount companies out there that have rates on the higher side, it is an extremely competitive business so the rates are usually pretty reasonable.  However, do remember that cost shouldn’t be your only concern – the quality of the services is also important.

As you consider a factoring company, read through their agreement carefully.  Many factoring companies obligate their clients to at least three months’ notice for ending the service.  Some factors have even longer periods which could end up costing your business quite a bit of money.  If you don’t agree with the notice period, be sure to negotiate. 

The overall costs of factoring and invoice discounting can be broken down into different types of charges.  The discount charges referred to in the factoring agreement work just like regular interest.  Typically, this charge is about 1.5% over the base rate, though it could go up to 3%.  It is calculated on a daily basis and applied monthly.

Credit management fees are also commonly associated with factoring.  This fee depends on your turnover, invoice volume and number of customers.  Such fees typically range from 0.75% to 2.5% of your turnover.  When it comes to invoice discounting, these fees may range from 0.2% to 0.5% of turnover.

The last common fee associated with factoring is the credit protection charge.  This is levied in non-recourse factoring and will always depend on the factor’s assessment of the risk.  Typically, the fee will range from 0.5% to 2.0% of the turnover.

 
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How Factoring Works

23 Mar

Any business that needs better flexibility and an increase in cash flow may consider factoring because it provides a quick, upfront payment against your existing sales ledger.  Factoring is a service provided to businesses that trade with other businesses on credit terms.  It isn’t usually available to retailers or cash traders, though some exceptions may apply.

There is a wide variety of factoring and invoice discounting companies out there.  Many are subsidiaries of larger banks while some are simple independent companies.  Either way, they will meet with you, visit your business, review your finances and take a look at your business plan before they agree to factor invoices for you.  Sometimes, credit limits are required.

Once you sign your factoring agreement, the factoring company will advance between 80% and 90% of the amount of your approved invoices.  Payment is usually made to you within a day or two, and the remaining percentage stays with the factoring company as their fee for service.  This fee is known as the factor fee.

The way it works is simple.  When you raise an invoice, it will instruct the client to pay the factor directly.  Once this happens, the factor will advance you the funds, less their fees.  The factoring company will issue statements to your clients on your behalf.

Most factoring agreements are for the long-term.  There will always be a notice period to the end of the service, so be sure you are fully aware of it.  In most cases it is around three months, though it could be longer. 

 
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The Difference Between Factoring, Invoice Discounting and an Overdraft

02 Mar

There comes a time when virtually every business needs cash urgently.  The reason might simply be that debtors are not paying on time, or the money might be needed to finance a new piece of equipment or to buy material for a large new project.  Whatever the reason for your cash deficit, you have several options to look into regarding financing. 

The traditional approach is to contact your bank and ask for a short-term loan or a bank overdraft.  The downside to this way of doing things is that it takes a lot of time – time which you might not have.  The bank would first want to check your credit history.  You will also have to provide them with audited financial statements for one or more years.  Your application will then go through the normal channels and it might take weeks before you have the money in your account.

Invoice factoring provides a business with a way to get the money in their bank account in as little as 24 hours.  All you need is proof of the outstanding debts that are owed to you.  The factoring company is not really interested in your balance sheet or your income statement for the past three years.  They will recover their money from your debtors, and therefore this is all they are interested in.  They will then provide you with a loan of between 80% and 95% of the outstanding amount and proceed to collect the money from your customers themselves.

If you have a very close relationship with your customers, you might not want an external company to collect money from them.  In this case invoice discounting could provide a solution to your problem.  The company will still provide you with a loan based on the debt you are owed, but they will not contact your customers.  You will have to collect the money yourself and pay off the invoice discounting company.

 
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Ins and Outs of Invoice Discounting

23 Feb

As with many financial contrasts, invoice discounting agreements can vary widely depending on multiple factors from the size and age of a company to its specific industry or credit score(s).  Choosing the right one can greatly benefit a company in need or one that simply wants to have access to cash flow without waiting for clients to pay outstanding invoices.

There are four main types of invoice discounting, as detailed below.

Disclosed Invoice Discounting

Disclosed invoice discounting is a plan by which the factor (lender) supplies up to 90% of a company’s invoices.  The company must pay the balance of the invoice to the factor when the client pays off the invoice.  The downside to this is that the law requires the company to disclose to the client its use of a factoring company.  This may not be a comfortable scenario for the client.  It is up to a company whether it decides to use disclosed invoice discounting or the alternative option, confidential invoice discounting.

Confidential Invoice Discounting

Confidential invoice discounting will provide up 90% of the value of an invoice, payable when the invoice is paid.  However, the relationship between the company and the factor remains unknown to the client.

Non-Recourse Discounting

Invoices will be funded to a company without the added burden of recourse.  Some factoring companies carry a separate credit protection policy.  It is vital for the borrower to know the circumstances surrounding repayment of bad debts.

Recourse Invoice Discounting

This plan requires the company to take responsibility for bad debts and non-payment.

 
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Invoice Factoring and Discounting

26 Dec

The financial practice of invoice finance involves a lender offering a short-term loan based on the value of an unpaid invoice.  It is known under a variety of names and is offered by many significant companies within the financial sector, including many banks that also have high street retail branches. 

This service may not be suitable for all companies and is largely aimed at those that deal on a business to business basis, often allowing their customers a period of credit.  When a company has completed a service or delivered goods, they will raise an invoice to the value of the goods or service.  This, in turn, may be secured against a loan specifically related to the value of that original invoice. 

A major decision for any company seeking to make use of this service is whether to choose ‘factoring’ or a ‘discounting’.  Invoice factoring involves a lender pursuing debts from the company that is liable for the invoice rather than the company that produced the invoice and borrowed money from the lender.  This can result in a third party lender imposing payment conditions or credit limits on the customers of the company that produced the invoice.  This, in turn, is liable to produce tension in the relationship between the business and its customer.  Invoice discounting is a similar service, whereby the company that produced the invoice and borrowed the money continues to be responsible for repayment, making contact between the lender and the clients to whom the invoice was delivered unnecessary.

 
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