GWR: Finance & Insurance

Business is always a gamble, especially if you operate a policy that allows your clients to pay in 30 – 60 days.  While it is a great way of attracting customers, it is not the best way of optimising your cashflow.  Though you know that payments will eventually find their way into your bank account, you also need to make sure that you have cash to see you through until the invoices clear.  Many business owners struggle with balancing their finances and turn to factoring companies to help them.

Factoring will ensure that businesses can get their hands on their money at the time it is needed.  It is a great way of adding financial flexibility to your bank account.  These days, banks will not always want to offer you loans and credit cards if you cannot prove a regular source of income.  This is one of the downsides of running a post recession business.

It is time to take control of your finances and pull yourself out of that black hole and consider employing the services of a factoring company that can offer you funds each time an invoice is raised.  By doing this, you will have considerably more time on your hands to take care of promoting your business and generating more sales.  Remember, it is all about the invoice, the more you can issue, the more cash you can get your hands on.  One major point that you should remember is that factoring is only normally available for businesses that serve commercial clients.

All around the world businesses suffer from one common problem, slow invoice payments.  It can be such a challenge, having to wait for payment and if you are planning to expand your company it is even more annoying.  You will often wind up with more value in your invoices than there are funds in the bank and although they will be paid eventually, it is often longer than you can afford to wait.

A massive downside of waiting for customers to pay for work done and services provided is that your bank account will not look very healthy.  A bank account that is not healthy will not be very beneficial if you are trying to arrange a loan.  Banks are currently extremely stringent in making sure that businesses have plenty of collateral to back up loans.  Following the recession, the majority of banks in the UK decided to safeguard their best interests and stop offering loans to the corporate market.  Invoice factoring is the perfect answer to this problem; in fact it is a method of providing capital almost instantaneously.

Factoring enables you to turn snail pace sales invoice payments into instant cash.  In business terminology, an invoice is simply an agreement from a customer to pay you for services rendered or products purchased.  Banks may not be interested in the value of your debtors list when agreeing a loan with you, but for invoice factoring companies it is often their sole business and they will be able to help you out in your time of financial need.

Choosing to work with an invoice factoring provider has the potential to negatively impact your relationship with your customers.  Fortunately, there are ways to minimise the possibility of damaging customer relationships by making sure you and the factoring provider are on the same page when it comes to contacting customers directly.  Here are a couple of tips.

Strategizing on Customer Contacts
Most invoice factoring companies will require that customer payments on factored invoices are sent directly to them, rather than to you.  This will necessitate changing the remittance address on your invoices.  Most will follow a format of using your company name as part of the address, along with the postal address to a lockbox secured especially for the payments.  By proactively contacting your customers in advance of the change, making the transition is usually easier for all parties involved, especially your clients.

Another potential issue occurs when a customer is late paying a factored invoice.  As the owner of that invoice, your factoring partner has the right to make direct contact and seek to secure payment.  Ask to review the form letters used by the factoring partner in the collection process, as well as the scripts used for telephone contacts.  Doing so will make it easier to possibly be involved in the process if the standard approaches are not in harmony with your company’s collection procedures.  As a result, the chances of a customer who accidentally misplaced an invoice being offended by the contact and choosing to take his or her business elsewhere is kept to a minimum, something that is in the best interest of both you and your factoring partner.

Invoice factoring is the practice of lending a company funds over a short period, based on the value of specific completed goods or services delivered by the original company to a third party.  It is called invoice financing, because the value of the loan is usually directly related to the value of the invoice.  The nature of the loan is directly related to how long it is expected it will take the invoice to be paid. 

In business to business transactions, payment for goods or services is rarely immediate, nor can it be expected to be.  However, this may not necessarily suit the aims of the company that has supplied the goods or services, especially if it needs immediate funds for other projects.  This is where invoice lending becomes a useful tool for business, because a third party lender can expedite the availability of funds for the value of an invoice. 

A lender may be able to offer a short term loan to a relatively high percentage of the original value of an invoice, perhaps even 100%, so that a company that has provided goods or services does not need to wait for an invoice to be paid before it gains access the money due.  Instead, it is able to have rapid access to funds that might be valuable to their business.  There are many well-known traditional lenders that also supply invoice factoring financial services to businesses.  This service is also known as invoice financing or invoice discounting.

Invoice factoring is the term for taking on the risk of another company, for goods or services already provided but not yet paid for and the debt is known as an account receivable.  Accounts receivable are usually due for payment within a specific timescale, usually between 15 and 60 days.  However the period of credit can sometimes be longer, especially for larger, more expensive goods.

Under the terms of an invoice factoring arrangement the factor takes over responsibility for the accounts receivables, paying the client company 80-90% of the amount outstanding, up front and then collecting remaining debt.  At the end of the agreed period, the remaining 10-20% is paid to the client company, less a percentage for interest and charges.

There are three parties involved in this arrangement, the company providing goods or services, the financing company or factor and the customer.  The factor is taking on a risk by, in effect, purchasing the customer’s debt and will therefore charge a higher amount in fees and interest depending on the perceived creditworthiness of the company.

Interest charges are usually a percentage of the amount borrowed and range from 1.5% – 3% above the Bank of England base rate.  The management charge, which is made in addition to the interest charge, is normally in the region of 0.5% – 2.5%.  The level of management charge or handling fee will depend on the company’s turnover and volume of sales processed.

Invoice factoring, sometimes known as ‘accounts receivable financing’, is an option that allows businesses to receive a cash advance against invoices owed to it by its customers.  A factoring company purchases the outstanding debt, offering the business a percentage of the total in cash.

What Costs are Involved?

Any invoice factoring company UK based at least, will usually charge a processing fee and/or a percentage based on the credit standing of the business’ clients or how long it takes to collect the invoices.  Depending on the contract with the factoring company, either all of the business’ invoices may be factored or only a few.  The contract can be long or short-term, depending on the needs of the business and the factoring company’s policies.

How is Factoring Different From a Bank Loan?

Banks normally loan money based on concrete, physical resources, such as buildings and vehicles.  A bank may also be willing to extend a line of credit to a well-established business based on past sales records and the viability of its business plan.  A factoring company is solely interested in purchasing the debt owed to the business and therefore makes the offer based on the credit worthiness of the its clients.

What Makes a Business a Good Candidate for Factoring?

A business might consider factoring as an option if:

•    Goods and services are offered to clients on credit.

•    Clients are other businesses.  Factoring is not normally offered to retail businesses that deal with individual customers.

•    Cashflow is an issue, due to the period of credit allowed between the services or goods being supplied and payment received.

•    The business could benefit from assistance collecting overdue payments.

•    Cash needed for expansion, expenses or supplies is tied up in outstanding accounts payable.

Invoice factoring companies generate their profits by charging fees and interest.  The interest rate, which is typically in the range of 1.5% to 3% above base rate, is calculated on a daily basis.  These rates are roughly the same as you would be charged by a bank for an overdraft and could even be cheaper.  The fees for invoice discounting are based on turnover and are typically between 0.2% and 0.5%.  This is significantly cheaper than invoice factoring, because only finance is provided.

If the factoring company is to be liable for bad debts, it will charge for credit protection.  The factoring company will assess the risk of bad debts, having carried out an audit of the business’s debtors and will base their fees on this.  The higher the risk the higher the fee they will charge.  Again, the fees are based on turnover and are typically between 0.5% and 2% of the company’s turnover.

There is a large number of invoice factoring companies operating in the UK and is a very competitive market, so the cost of invoice factoring can be very reasonable; it definitely pays to shop around.

Cost should not be the only consideration when choosing an invoice factoring company.  You should take a close look at the level of service being offered and how much notice you need to give to terminate the agreement.  The notice period is usually three months, but some companies may expect you to give a year’s notice, so be prepared to haggle.

Factoring is an effective finance solution for almost any company.  It enables a business to sell its invoices in order to receive almost instant payment.  Companies can raise outstanding customer invoices and be advanced up to 95% of their value within as little as 24 hours.  This has no effect whatsoever on the credit terms agreed with the company’s customers.

Invoice factoring enables a business to receive the money they are owed for their outstanding invoices without having to wait a month or longer.  Furthermore, by using invoice factoring companies, the business is no longer responsible for chasing up customer payments; this task is down to the factoring companies themselves.  Factoring therefore bridges the often excessive period of time between presenting an invoice to a customer and receiving payment for the goods or services provided.

With confidential invoice finance, the factoring company collects outstanding invoice payments from customers in the name of the business they are working for.  This means that the customers are unaware of the fact that the company they are doing business with is using a factoring company.  Confidential invoice finance companies of this kind provide dedicated customer support to a business’s clients, yet they will be completely unaware of the fact that they are corresponding with an outsourcing company.

By taking advantage of confidential invoice factoring, business owners can concentrate on running their companies and leave the invoice finance company to organise credit control on their behalf.