What is Invoice Finance?

What is invoice finance and how can you use it?


It’s possible that in the past you’ve made an assumption that invoice financing in the UK is only for businesses that are struggling to make ends meet. Perhaps you’ve never even heard of invoice financing (also known as debt factoring, invoice factoring, asset based lending, and factoring financing) before today. If so, don’t panic — we’re here to help!
 

The Process

  1. Once you have found the finance provider you wish to work with, you will usually enter into a contract that transfers the management of your sales ledger and credit control to them.
  2. When an invoice is sent to your customer the finance provider will advance up to 95% of the total invoice amount
  3. On receipt of full payment from your customer the finance provider will pay you the remaining balance minus the agreed fee for their service.

For example…

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A customer owes you £20,000. You pass the invoice to the finance provider who will pay you £18,000 (90% of the debt). They collect the total £20,000 from your customer and, on receipt, will pay you the remaining £2,000, minus any fees you owe them.

Sounds simple enough, so why do you need WhatCost?

While the concept of invoice finance is pretty universal the contract terms, fees and quality of the service you get will vary depending on the provider. Every company will be queuing up to tell you that they’re the best in the business, but there are several factors to consider when making your choice. They’ll be dealing directly with your customers so it’s crucial they meet your standards.

In addition, contracts tend to be on a longer term basis so now is the time to do your homework. This is where we can help; send us an enquiry and we’ll recommend up to 3 different providers that are best suited to your business. The choice is up to you which quote, if any, you take forward.

Contract Period

A key consideration is just how long you will require the service. Will they let you pick and choose the invoices to be factored or is it an all or nothing deal? Is there any wiggle room or an exit clause if needed? Termination notice period? Will you incur penalties for early cancellation?  Down the line these factors could be key.

Advance rates

Each invoice finance provider will offer a different level of advance. Generally this is between 70-95% of the total invoice amount.

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Fees

Each provider will charge you differently. While some will specify an ‘all in’ amount, some may add extra charges for additional services. For example, sending letters, performing credit checks, same day bank transfer could all incur additional charges or ‘disbursements’. There may also be interest charges if a customer is late in paying their invoice.  What happens if the customer doesn’t pay at all? It’s best to get it all out in the open so ask all your questions at the outset.

What do Invoice Finance Providers Do?

The provider will be acting on your behalf, communicating directly with your customers so it’s crucial to know that they are polite, efficient and professional.  They should be able to provide you with recommendations from other clients as well as cold hard statistics e.g. how long does it take them to collect a debt on average?  What percentage of debts do they successfully recover? Remember, you may be paying interest charges on debts that take longer to collect so it’s in your interest to gauge their competence.

It’s worth knowing, for your own peace of mind, that 95% of asset based lenders are Asset Based Finance Association (ABFA) members

Disclosed or Confidential

The majority of providers operate on a ‘disclosed’ basis so your customers will be aware that you have sent your invoices to a third party, but a few may offer a ‘confidential’ factoring option, where customers are unaware of their involvement. This is commonly referred to as CHOCC (Client Handles Own Credit Control).
However, this is rare in invoice factoring. If this presents an issue for you it may be that an invoice discounting service, where you remain in control of your sales ledger and debt collection, is more suitable for you.

Insurance

What happens if one of your customers cannot pay their invoice? Customer insolvency is a risk that needs to be considered by both parties so some factoring providers include ‘bad debt protection’ or ‘recourse facilities’. This insurance means in the event that a customer can’t or won’t pay, the funds can be recovered. If this is not included in your contract, in the event that a customer does not pay you would have to pay back any funds advanced by the provider.

Debt Exposure Limit

Sometimes called a ‘high involvement’ or ‘concentration’ limit, some providers demand that only a certain percentage of a business’ sales ledger can be from a single customer. For smaller businesses who work primarily a few key clients this can be a stumbling block.

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