SME Business Owners

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.

What Is Invoice Discounting?

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.

Is Factoring Right For Your Business?

Firstly your business must be selling a
product or providing a service that is
acceptable to a factoring company.
Ideally you must be able to show that an
invoice is payable once the product or
service has been provided to your
customer. Most businesses are suitable
but the following issues can be a problem
to most factoring companies;
1. Goods sold on a sale or return basis
2. Businesses that buy goods from their
customers
3. Stage payments over a period of a
contract
Your business must be selling to businesses or Government Bodies. Factoring companies
cannot deal with businesses who sell to consumers. Factoring companies will expect your
customers to be creditworthy. It is important that the majority of your customers are mainly
within terms, factoring companies will not advance against old debts.
Your business will be expected to have a good accounting system that produces a robust
paper trail that shows evidence that your customers have been provided with the goods
stated on the invoice. Remember todays customer may have to be taken to Court to obtain
payment. Unless the paper trail is sound the debt may not be enforceable.

Is Invoice Discounting Right For My Business?

Many of the points mentioned on the factoring page apply to invoice discounting.
However, because the factor is dependent on you for collecting their money you will need
to demonstrate that your business has a good accounting package and that you have a
proven record of managing your sales ledger. The money collected from the customers will
have to be paid to the factor and they will need to be sure that your finances are sound as it
is easy to pay such monies into the business account rather than to the factor. Such a
practice represents a serious breach of the facility.
Factoring companies expect businesses to be of a higher quality than those they will be
offering factoring facilities to.

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.

Top Tips for Competitive Invoice Finance Deals

Businesses are always looking for a competitive proposal from a factoring
company and we are often asked how can that be achieved?
It is important to present your business in the best possible light in order to make
your business an attractive proposal. Here we have set out the ten top issues that
need to be addressed when presenting a proposal to a Factoring company.
1. A very efficient invoicing procedure.
Businesses should ensure that the invoice accurately reflect the price that the customer
expects to pay and the terms of payment. The invoices that you issue are what the factoring
company rely upon when they advance your company money so it is important that they are
produced in a way that will ensure that your customers pass them for payment as soon as
possible. Remember if an invoice has a query regarding price or quantity it will be rejected.
This will result in your invoice not being processed for payment. All companies receive

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.

3. A good spread of customers

In an ideal world a business should have a
good spread of customers and factoring
companies like a business that is owed money
from a number of customers. A good spread to
protect both your company and the factor.
Should a customer fail your business will
survive if it has a spread as you do not have all
your eggs in one basket.
Remember the factoring company will not expect all your customers to be top rated or blue
chip. A good spread of sound companies will be fine.

4. Low level of disputes

This point really relates to my earlier point about accurate invoicing. An incorrect invoice
will be disputed by the factoring company and will affect your funding. Worse still the
factor will dispute the whole invoice regardless of the size of the dispute. For example a
dispute of 10 on a 1000 invoice will result in a 1000 loss funding. Some factoring
companies will also dispute a whole account if there excessive disputes with one customer.
A continued high level of disputes will result in material changes to your agreement such as
a reduction in pre-payment.

5. Low level of credit notes

A high level of credit notes indicates poor invoicing or that customers are not happy with
the product/service and have disputed invoices.

6. Positive Balance Sheet

All lenders like to see that companies are solvent, i.e. assets exceed liabilities. Fortunately
factorings unlike Banks will consider businesses that are technically insolvent but it wont
get you the best deal.

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.

8. A good credit rating from an agency

such as Experian, D&B and Creditsafe
Credit rating agencies gather information
from a number of sources and factoring
companies will always carry out searches. A
poor credit rating and County Court
Judgments will not help your case.

9. No outstanding HMRC liabilities

PAYE and VAT should be up to date. If there
are arrears then there should be an agreed
repayment plan in place.

10. Directors/owners
corporate history

have

good

A trail of failed companies will concern any

factoring company as they may feel the
current company could go the same way.

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.

The following can raise concerns to lenders

Concentrations
Most factoring companies prefer a spread of customers but some will look at single
customer situations subject to the credit rating of the customer and the type of product
being sold. Whilst it is not ideal to have all your eggs in one basket this situation often
arises in the early stages of a companys life.
Poor Credit
A company that has suffered cash flow issues may have been sued by suppliers and have
judgements registered against it and these judgements are in the public domain and often
make it difficult to gain credit from suppliers and funding from finance companies. The
company would need to demonstrate that the new factoring will provide additional cash
flow to settle these judgements and ensure that future suppliers are paid in an orderly
manner.
HMRC Issues
Arrears of both PAYE and VAT are of a concern, The new RTI system for PAYE enables
HMRC to identify arrears in PAYE as companies now have to file monthly returns. Before RTI
was introduced companies completed an annual return so a company could accumulate
considerable arrears without HMRC being aware for over a year. HMRC have considerable
powers and any funder will want to know that an agreement is in place by the time they
release funds against the ledger. We are able to arrange facilities for such situations.
Directors with poor Corporate History
In a nutshell this means that a Director has been involved in failed companies. With so
much information in the public domain it is easy to establish the business history of a
Director and also if previous companies left factoring companies with debt. Most funders
will not be interested in such proposals, but we have a number who will look at these
situations in a positive way.
Poorly Managed Ledger
Ideally most of the ledger should be current and within terms. Most company owners are
focused on sales and credit control is often done on an ad hoc basis, ie customers are
chased when money is needed as opposed to being a pro active exercise. A number of
factoring companies will look at these situations and by offering a professional credit
management service they can improve a ledger and in turn improve cash flow.

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.

About Hugh Craen - FindmeaFactor.com

Findmeafactor.com is owned and managed by BFS ( Sussex) Ltd. The prime mover is Hugh
Craen who has had over twenty five years experience in the factoring industry.

Hugh has had experience in all areas of factoring and

debtor finance In the 1990s he created a unique product
to finance football transfers and in 2000 floated a
factoring company on the AIM market of the London
Stock Exchange. He has an insight on both the factoring
industry as well as an understanding of the business
market as he offers consultancy to a number of
businesses in different sectors . This level of experience is
invaluable to business owners seeking finance facilities.

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.