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Guide to
Invoice Finance
Hugh Craen
FindmeaFactor.com
What Is Factoring?
Factoring originally started in the USA and was used to finance the textile trade on the East
Coast of America. It was introduced to the UK about 40 years ago, but the real growth has
been over the last 10 years partly as a result of the High Street Banks being less than
enthusiastic about offering facilities to small businesses.
Factoring in its basic form is a way of financing your business by assigning invoices to a
factoring company in return for an advance of up to 90% of the gross value of the assigned
invoices. The name of the Factor will be printed on the invoices and your customer will pay
the factoring company direct. On receipt of the payment the balance of the advance will be
repaid to your company less charges. The percentage advance will vary according to the
quality of the product and customer. The stronger your business, product and customer the
higher the advance against the invoice.
The factoring company will issue monthly statements and reminders and effectively
become an outsourced sales ledger department. Many small businesses find the more
experienced methods employed by a factoring company a real advantage to ensuring their
customers pay on time.
The costs are based on workload and risk. There are two charges, a factoring charge which
is normally a percentage of the gross annual sales (sales including VAT) and an interest
charge for the money that is advanced by the factor.
Many factors offer a bad debt protection against possible bad debts. There will always be
an additional charge for this service.
Invoice Discounting is a similar facility to factoring. With factoring, the factoring company
manages the sales ledger, they issue statements, reminder letters and receive payments
directly from the customers.
With invoice discounting you are responsible for managing the ledger and collecting the
money from your customers. Unlike factoring your customer will have no knowledge of
your arrangement with the factoring company as there is no notice of assignment on the
invoice.
Invoice discounting has become increasingly popular as many businesses are not keen to
have a notification on their invoices. As the factoring company does not have the same level
of control over the ledger they are more demanding in their requirements before offering
such a facility.
Charges for invoice discounting can be less than for factoring as the factor does not have to
carry out all the sales ledger services that are associated with a factoring arrangement.
invoices and should be aware of how an invoice should be presented. It is important that
invoices are issued as soon as the goods or services have been delivered to the customer.
2. Good document or electronic backup supporting the invoice, i.e. delivery notes
and order confirmation
All invoices should be able to be supported by
a proof of delivery and factoring companies
see this as vital as it effectively validates the
invoice. Remember your invoice will be
assigned to the factoring company and they
may have to take legal action to recover
money owed. Todays customer can often be
tomorrow's defendant in Court, so make sure
that you have all the documentation to win.
7. Profitable trading or if not, a plan that shows profitable trading in the future
Businesses that dont make profits generally fail so it is always better if a business is making
profits. If profits are not being made it is important to demonstrate that profits are on the
way and the business is not heading in the wrong direction.
10. Directors/owners
corporate history
have
good
Problem Cases
Earlier in this book we set out how to achieve the best type of deal. This really applies to
companies who are attractive to factoring companies who in turn will try and put in place
competitive packages.
Whilst many businesses can achieve attractive deals there are a large number of companies
and Directors who have had difficult trading periods and suffer from adverse credit. The
good news is that there are a number of factoring companies are prepared to look at
difficult cases provided they can be satisfied that their funding will be secure and offer the
troubled business a way forward.
Construction
This is a huge sector which has unique issues such as stage payments and applications.
These two areas are often of little interest to many funders. There are specialized factoring
companies who we have good relationships with and can place this type of business.
Whilst the above situations can be placed the terms offered by factoring companies are not
cheap and may have additional terms to protect them. Ideally a company should aim to
improve their trading profile and move to a factoring company who can offer better terms.
The factoring sector is so diverse and dynamic a home can be found for virtually every
proposal.
We at FindmeaFactor have relationships with a large number of factoring companies and
have placed difficult situations in the last 12 months.
Our aim is to assess the needs of a business and arrange a suitable facility for them. Once
the facility is in place we are available to assist in any ongoing issues that may arise.