Invoice Finance Industry Sectors

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1 Invoice Finance Industry Sectors TRAINING MANUAL

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3 Contents Preface 5 About SBF 7 Types of businesses Beer & Wine 8 Builders Merchants 9 Chemicals 10 Clothing Wholesaler 11 Computer Hardware 12 Computer Software 13 Construction & Heavy Engineering 14 Contract Cleaning 16 DIY & Large Retailer Supplies (Wholesale) 17 Flooring Contractors 18 Food & Drink 19 Fruit, Fish & Meat (Wholesale) 20 Furniture Makers & Office Furniture 21 Haulage 22 Injection Moulding 24 Marketing & Advertising 25 Plant Hire 26 Precision Engineering 27 Printing 28 Recruitment 30 Seed & Fertilizer (Wholesale) 32 Shopfitters 33 Stationery & Office Supplies 34 Steel Stockholders 35 Textiles 36 Timber Merchants 37 Glossary of Terms 38 3

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5 Preface Invoice Finance - Industry Sector Guide This book has been produced specifically as a guide for solicitors, accountants, brokers and corporate finance professionals who recommend invoice finance to companies as a working capital facility to aid cashflow. This handy guide highlights the key questions that are associated with certain industry sectors within the invoice finance arena and is intended to simplify elements that are required for an invoice finance facility. Compiled in alphabetical sector order this is the ultimate at a glance information booklet. Please note that this is not a comprehensive listing and should you have any questions relating to the content herein or require further clarification on any aspect please do not hesitate to contact us. We do hope you find this guide useful. 5

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7 About SBF Skipton Business Finance Limited (SBF) is a wholly owned subsidiary of Skipton Building Society, an undoubted mutual financial institution established in Independence Independent of the main banks, we provide a strong and recognisable brand whilst allowing a diversity of funding which gives greater stability to our clients businesses. Ethos With no expensive shareholder dividends to pay, the ethos of our business is very much focused on understanding our clients businesses and assisting in creating wealth and jobs in the regions, rather than purely profit. This naturally leads to a partnership approach with our clients, where we appreciate our success is determined by their success. Facilities We provide an array of financial products ranging from factoring to confidential invoice discounting, including the Government-backed Enterprise Finance Guarantee Scheme, and asset finance to SMEs from new-start to businesses turning over 30m. Our facilities can be used to fund start-ups, transactions, turnaround/ restructures, phoenix and pre-pack type deals. SBF is all about having quick access to flexible funding, employing specialist staff and having localised functions under one roof which enables even closer relationships with our clients and business partners in the regions. 7

8 Beer & Wine Helpline: Who do you sell to? Do you get a signed proof of delivery? Sale or Return: Does the customer have the ability to return any unsold product in return for a credit? If so, we may be unable to fund the invoice as there is no guarantee of payment. Debtor Quality: Typically the quality of customers seen in the industry is poor with the sales ledger often consisting of many small pubs and restaurants. This can cause issues with collectability and a potential increase for bad debts. Quality of PODs: As out-of-hours deliveries are common in this industry, the quality of delivery documentation is generally low (i.e. no-one is available to sign the delivery note). Poor proof of delivery can result in issues when collecting the debt. The above may result in the need to offer facilities with reduced prepayment levels. 8

9 Builders Merchants Who do you sell to? Do you raise many credit notes? What s the split between credit sales and cash sales? Debtor Quality: If the customer base is made up from lots of small builders/small traders, they may have poor ratings and may also be difficult to contact during working hours. This can cause issues with collectability and a potential increase for bad debts. Returns Policy & Exchanges: Is the return of unused materials allowed? This may lead to an increase in the level of credit notes being raised. Mix of Cash and Credit Sales: Customers who pay for their goods using cash are not fundable under a factoring/invoice discounting facility. Retrospective Rebates: Does the client offer discounts to customers based on account turnover? Are the discounts shown on invoices as they are raised or are they calculated over a period and taken retrospectively? If taken retrospectively, it may be necessary to maintain a reserve to avoid any potential set-off against outstanding invoices. 9

10 Chemicals Helpline: Do you enter into supply agreement contracts? Are the chemicals hazardous? Regulation: Does the business have all of the necessary product liability, contamination insurance and safety procedures to meet the required industry standards (eg. ISO9002)? Free Issue Containers: Are the containers in which the chemicals are transported owned by the client or are they provided by the customer? If provided by the customer, are they readily identifiable as belonging to the customer and held separately to avoid any potential set-off? Supply Agreements: How is the product ordered by the customer? Do they provide blanket purchase orders with regular call-off or is a separate purchase order received for each job? Blanket orders may require a divisibility clause to avoid potential offset claims should the client be unable to fulfil the whole order. 10

11 Clothing Wholesaler Who do you sell to? What do you supply? Is the business seasonal? Sale or Return / Stock Cleanse: Does the prospect offer any form of sale or return or is there any agreed stock cleanse process? If so, we may not be able fund the invoice as there is no guarantee of payment. 11

12 Computer Hardware Helpline: Extended Guarantee: Most products are supplied with a standard 12 month guarantee. Is there any extended warranty or guarantee for the product? If so any outstanding invoices may be disputed by the customer if the prospect fails as they will not be around to honour any warranty claims. Guarantees which are simply passed on from the original manufacture are usually acceptable as these are classed as Back to Back Guarantees (i.e. a 12 month warranty provided on a computer from Dell). Deposits: Where deposits are taken in advance of the product being delivered or work completed, it is likely that at any point in time there will be a mixture of invoices for fulfilled work outstanding together with deposits received. Should the prospect fail it is certain that customers will offset deposits paid against any outstanding invoices. Installation: Is there any element of installation work? We will only be comfortable funding this type of work if the invoice is raised in arrears of the full installation being completed and a confirmation of service / satisfaction document has been obtained from the customer. Staged Invoicing: Where staged invoicing occurs, we will typically only be able to fund the final invoice once the job has been completed in full (including the completion of any testing or commissioning) unless there is unconditional divisibility clauses for each stage of the order. 12

13 Computer Software Is it bespoke or off-the-shelf? Licences: Invoices which relate to products sold with a licence are often raised in advance of the period to which they relate and are therefore not fundable (i.e. an invoice will be raised in January for the coming 12 month licence). Maintenance Agreements: Is their an ongoing agreement between the prospect and the customer to maintain the product over a defined period? We are unable to fund this type of work as it is typically invoiced in advance of the service being fulfilled (i.e. invoice raised in January for the coming 12 months) and is unlikely to be paid should the prospect fail. Bespoke: If the bespoke product does not work and the customer is unable to obtain the finished product from elsewhere, they are unlikely to pay for any work previously undertaken and invoiced. There is also a risk that there will be a requirement to support the product once delivered this is categorised as maintenance work (see above). 13

14 Construction & Heavy Engineering Helpline: Is there a contract in place? How long does it take to complete an average job? Length of Job: We are able to fund small jobs which are completed quickly and where satisfaction notes are obtained. Larger jobs tend to have an overriding contract which may include deposits, staged payments, applications for payment, retentions and liquidated damage clauses all of which will make the debt difficult to fund. 14

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16 Contract Cleaning Helpline: How does the customer confirm the work has been done to their satisfaction? Is there a contract in place? Proof of Debt: As the service is typically provided out of hours, there is generally a lack of customer sign off available. Does the prospect have a process in place to confirm acceptability of the service provided? Contracts: Is there an underlying contract in place? If so, we will require a copy for inspection to ensure that the invoicing is in arrears of the work being completed and is divisible (see glossary). 16

17 DIY & Large Retail Suppliers (Wholesale To) Who do you sell to? Is there any high customer concentration on the ledger? Product: How simple is the product? Is it a straight forward operation or is there some form of contractual arrangement which may include sale or return, stock cleansing etc? Customers: Does the prospect deal with any of the larger retail sheds (i.e. B&Q, Argos, Aldi, Makro etc). These businesses typically have extremely onerous terms contained within their purchase orders which make funding high concentrations of this type of debt difficult. 17

18 Flooring Contractors Helpline: How long does it take to complete a normal job? When do you raise the invoice? Length of Job: We are able to fund small jobs which are completed quickly and where satisfaction notes are obtained. Larger jobs tend to have an overriding contract which may include deposits, staged payments, applications for payment, retentions and liquidated damage clauses all of which may make the debt difficult to fund. Extended Warranty: Is there any extended warranty or guarantee for the product? If so, any outstanding invoices may be disputed by the customer if the prospect fails as they will not be around to honour any warranty claims. 18

19 Food & Drink Who are your larger customers? What is the shelf life of the products? Shelf life: What is the shelf life of the product? Is there a high instance of returns due to product quality issues? Compliance: Does the prospect meet the current Health & Safety and legal requirements for their industry? Discounts: Does the prospect offer any form of discount to their customers? If so, when and how is this applied to invoices? Over-Riders: Is the prospect required to make any marketing contributions to their customers? This is common where businesses sell into large retailers and supermarkets. 19

20 Fruit, Fish & Meat (Wholesale) Helpline: Do you always obtain a signed Proof of Delivery? Who are you selling to? 20 Debtor Quality: Typically the quality of customers seen in the industry is poor with the ledger consisting of many small retailers and restaurants. This can cause issues with collectability and potential increase for bad debts. Quality of PODs: As out of hours deliveries are common in this industry, the quality of delivery documentation is generally low i.e. no-one is available to sign the delivery notes. Poor proof of delivery can result in issues when collecting the debt. Customer Payment: Do drivers collect cheques and cash whilst on their delivery rounds? A high percentage of cash receipts are undesirable as the monies are often used in other areas of the business rather than being banked through the trust account (i.e. to pay for vehicle fuel etc). The above may result in the need to offer facilities with reduced prepayment levels.

21 Furniture Makers & Office Furniture Do you offer an extended manufacturer s guarantee? Is there any installation? Guarantees: Product is typically supplied with a standard 12 month guarantee. Anything in excess of this may cause issues with funding. Compliance: Does the product meet all of the Health & Safety and legal requirements for the industry? Over-Riders: Is the prospect required to make any marketing contributions to their customers? This is common where businesses sell into large retailers and supermarkets. Discounts: Does the prospect offer any form of discount to their customers? If so, when and how is this applied to invoices? 21

22 Haulage Helpline: Do you work for the other haulage companies? Do you retain copies of PODs? Are you a member of a pallet network? Contra: Are there any customers who also appear on your purchase ledger? This may give rise to a potential offset should the prospect fail and so we may need to maintain a reserve accordingly. Proof of Delivery: Are copies of the delivery notes retained by the prospect or are they all returned to the end customer. It is a requirement of our facilities that the prospects retain copies of delivery notes for periodic review. Operators Licence: It is imperative that the prospect holds a valid operators licence. Storage & Warehousing: Does the prospect offer any form of storage or warehousing facilities to customers? In order to fund this type of service we require that the invoices be raised in arrears of the period to which they relate. Hub & Spoke: Is the prospect part of a pallet network or hub & spoke operation which may lead to potential contra/offset issues. 22

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24 Injection Moulding Helpline: What sectors are your customers in? Do you manufacture under contracts? Tooling: Does the prospect invoice the customer for any tools used to fulfil the order? If so, we require that these are held separately, are insured and are readily identifiable as belonging to the customer. Contracts: Are there any underlying contracts in place? Certain sectors include restrictive clauses which give rise to counter claims. Staged Invoicing: Where staged invoicing occurs, we will typically only be able to fund the final invoice once the job has been completed in full (including the completion of any testing or commissioning) unless the purchase order is specifically divisible. Deposits: Where deposits are taken in advance of the product being delivered or work completed, it is likely that at any point in time there will be a mixture of invoices for fulfilled work outstanding together with deposits received. Should the prospect fail it is certain that customers will offset deposits paid against any outstanding invoices. 24 Bill & Hold: Are there any instances where product will be completed and invoiced but not yet delivered? If so we will require confirmation from the customer that they agree to be invoiced on this basis.

25 Marketing & Advertising What do you do for your customers? How do you obtain sign-off? Retainers: Does the prospect charge any retainer fees? In order to fund this type of work, the invoices must be raised in arrears of the period to which they relate. Staged Invoicing: Where staged invoicing occurs, we will typically only be able to fund the final invoice once the job has been completed in full unless any purchase order is specifically divisible. Proof of Service: What documentation can the prospect provide to support that work has been completed and also accepted by the customer? 25

26 Plant Hire Helpline: Do you supply an operator with the vehicle? When is the invoice raised? Compliance: CIS registration is required for any business which is providing operators with the vehicle or plant. Debtor Quality: Is the customer base made up from lots of small builders / small traders who may have poor ratings and be difficult to contact during working hours. Terms of Hire: In order to be fundable, invoices must be raised in arrears of the period to which they relate. There must also be a robust system to validate the off-hire of plant in order to reduce any potential disputes over rental periods. 26

27 Precision Engineering What sectors are your customers in? Do you manufacture under contracts / just in time arrangements? Contracts: Are there any underlying contracts in place? Certain sectors may include restrictive clauses which can give rise to counter claim. Free Issue Material: Does the prospect undertake work on material which has been provided by the customer? If so, they need to ensure that the material is held separately, is insured and readily identifiable as belong to the customer. Staged Invoicing: Where staged invoicing occurs, we will typically only be able to fund the final invoice once the job has been completed in full (including any testing or commissioning) unless the purchase order is specifically divisible. Deposits: Where deposits are taken in advance of the product being delivered or work completed, it is likely that at any point in time there will be a mixture of invoices for fulfilled work outstanding together with deposits received. Should the prospect fail it is certain that customers will offset deposits paid against any outstanding invoices. Bill & Hold: Are there any instances where product will be completed and invoiced but not yet delivered? If so, we will require confirmation from the customer that they agree to be invoiced on this basis. 27

28 Printing Helpline: Do you print or sub-contract out? Is the print checked for quality prior to despatch? Design: Is the artwork produced by the prospect or is it provided by the customer? Where the prospect produces the artwork we require some form of formal signoff or acceptance from the customer. Quality: Is print work always quality checked prior to dispatch or is there an element of work which is outsourced and delivered directly to the customer? Disputes can arise where the quality of print has not been checked and is subsequently not accepted by the customer. Bill & Hold: Are there any instances where product will be completed and invoiced but not immediately delivered? If so, we will require confirmation from the customer that they agree to be invoiced on this basis. 28

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30 Recruitment Helpline: What is the split between temporary and permanent placements? What are the claw back terms on permanent placements? Compliance: Does the prospect meet all of the legal requirements for their industry? (i.e. do they require / hold a current Gang Masters Licence) Temporary Manpower: Does the prospect obtain signed timesheets for all placements? Permanent Placements: Is there any claw back period if the placement does not complete a set period of employment? 30

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32 Seed & Fertilizer (Wholesale) Helpline: Who do you sell to? Do you offer special terms? Debtor Quality: Typically the quality of customers seen in the industry is poor with many small farms and farmers making up the sales ledger. This can cause issues with collectability and potential increase for bad debts. Extended Credit Terms: Does the prospect offer increased credit terms? We would typically only fund invoices up to 90 days end of month terms. 32

33 Shop Fitters How long does a normal job take? When do you raise invoices? Length of Job: We are able to fund small jobs which are completed quickly and where satisfaction notes are obtained. Larger jobs tend to have an overriding contract which may include deposits, staged payments, applications for payment, retentions and liquidated damage clauses all of which will make the debt difficult to fund. 33

34 Stationery & Office Supplies Helpline: What s your average order size? How many customers do you have? How many invoices do you raise per week? Debtor Quality: Is the customer base made up from a high number of small offices/small businesses who may have poor ratings? This may affect the collectability of the ledger and potential increase for bad debts. This may result in the need to offer facilities with reduced prepayment levels. 34

35 Steel Stockholders Do you trade with other steel stock holders? Contra: Does the prospect trade with other steel stock holders? This may give rise to a potential offset should the prospect fail and so we may need to maintain a reserve accordingly. 35

36 Textiles Helpline: Seasonality - is there any seasonality to the sales? Dilution - are there any returns or disputes regarding fading? Samples - do you charge for samples and what is the returns policy? Who are they selling to? What stage in the product process are they involved? Dying, weaving...etc Free Issue Material: Does the prospect undertake work on material which has been provided by the customer? If so, they need to ensure that the material is held separately, is insured and readily identifiable as belong to the customer. Debtor Quality: Is the customer base made up from a high number of small manufacturing businesses who may have poor ratings? This may affect the collectability of the ledger and potential increase for bad debts. 36

37 Timber Merchants Do you provide other added value ancilliary services (e.g. sawing, planing etc) Who do you sell to? Compliance: Does the prospect meet all of the legal requirements for the sector? (i.e. importation of restricted product?) Contra: Does the prospect trade with other timber merchants? This may give rise to a potential offset should the prospect fail and so we may need to maintain a reserve accordingly. Quality: Is quality of the timber always checked prior to dispatch or is there an element of product being delivered directly from source? Disputes can arise where the quality of the timber has not been checked and is subsequently not accepted by the customer. 37

38 Glossary of Terms Advertising Contributions Where a customer requests a financial contribution from the client to cover some of the costs incurred in marketing their product (also see Over-Riders). Applications For Payment A document issued by the client to the customer requesting payment for a completed stage of work under a contract. Most commonly used in the construction sector. These documents differ from an invoice in that they do not include VAT and are normally on a measured works basis and so it is not unusual for the value to be adjusted (normally reduced) by the customer prior to acceptance. Bill & Hold Relates to situations where goods are produced for a customer and an invoice for the full amount raised but where the goods remain at the clients premises i.e. invoiced but not yet delivered. Sometimes referred to as constructive delivery. Blanket Orders Where a purchase order specifies more than one delivery over a period of time (also see Scheduled Orders). Call Off Orders A call off order is used for the supply of a specific quantity of goods or services over a given time period. Delivery will be made either to a delivery schedule or more usually by separate call off orders placed against the contract. Client The company using the invoice discounting/factoring facility. Constructive Delivery See Bill & Hold 38

39 Glossary of Terms cont Contra Trading Buying and selling with the same customer. i.e. where the same company appears on both the clients debtors and the creditors ledgers creating a potential right of set-off. Also known as reciprocal trading. Customer The company being sold to by the client or prospect. Also referred to as the debtor. Debtor See Customer. Divisibility Clause A clause which can be included within terms & conditions and allows a client to invoice completed sections of work despite being part of a larger job which has only been partially fulfilled. Direct Deliveries Where goods are dispatched from the supplier directly to the end customer without passing via the client. Extended Terms Customer payment terms in excess of 30 days end of month. Free Issue Material Raw material or partially completed product which is supplied to the client free of charge by the customer to be used in the fulfilment of their order. Hub & Spoke Operation Where deliveries for a specific region are given to the client by the hub and in return deliveries by the client out of their area are passed to the hub creating a contra situation. 39

40 Glossary of Terms cont 40 Gang Masters Licence Government granted licence which is required by companies supplying or using workers to supply a service in agriculture, food processing & packaging, horticulture & forestry or shellfish gathering. JCT Contracts Joint Contracts Tribunal Contracts are typically associated with the construction industry and generally include liquidated damages etc. Liquidated Damages The ability of a customer to set-off the additional costs of finding another provider should a client fail to fulfil their obligations under the terms of an agreed contract. Measured Works Generally related to the construction sector, a client estimates the work they have completed against an ongoing job and raises and invoice/application for payment. Depending on the type of work being undertaken there can be significant discrepancies between the value estimated by the client and that agreed by the customer. Operators Licence Vehicle and Operator Services Agency (VOSA) issued licence required by any haulage or courier business operating vehicles with a maximum gross weight in excess of 3.5 tonnes. Over-Riders Where a customer requests a financial contribution from the client to cover some of the costs incurred in marketing their product (also see Advertising Contributions). Proof of Delivery (POD) Any document which confirms the successful delivery of goods or fulfilment of a service to an end customer.

41 Glossary of Terms cont Prospect The company looking to setup an invoice discounting / factoring facility. Reciprocal Trading See Contra Trading. Reservation of Title (ROT) Also referred to as Retention of Title, ROT is a clause contained within a companies Terms & Conditions stating that title of the goods does not pass until payment has been received. Should payment not be received then the supplier is able to take the goods back provided that they are readily identifiable. Reserve An amount held back from a clients available funds under an invoice discounting/factoring facility normally as a result of a potential set-off risk. Retrospective Rebates A discount which is not shown or given at the time of raising the invoice but is accumulated quarterly or annually dependent upon the value of sales over that agreed period. Sale or Exchange An agreement between a client and their customer whereby goods purchased but not sold by the customer can be returned to the client at a future date in exchange for new product. Sale or Return (SOR) An agreement between a client and their customer whereby goods purchased but not sold by the customer can be returned to the client at a future date and issued a refund. 41

42 Glossary of Terms cont Scheduled Orders Where a purchase order specifies more than one delivery over a period of time (also see Blanket Orders). Self Bill A document issued by a customer to the client detailing their next payment value and date. customers operating a self bill system do not require an invoice to be issued by the client to trigger a payment as the process is managed internally by the customer. Set-Off The ability for a customer to reduce the amount owing to a client by claiming that they are owed money from the client themselves i.e. in a contra situation or liquidated damage claim. Staged Invoicing Where an invoice is raised for work completed but prior to the completion of all of the work detailed on the original purchase order. Stock Cleanse An agreement under which a customer is able to return slow moving or redundant stock to a client in return for new product or full refund. Supply Agreements An underlying contract setting out the terms on which goods or services are supplied. Thes will overide any other terms and conditions the client may trade under. Tooling Any item which is specifically manufactured to create a product for a customer i.e. a particular mould shape for a use with an injection moulding order. 42

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44 A Skipton Building Society Company REGISTERED OFFICE Skipton Business Finance Limited The Bailey, Skipton, BD23 1DN t: Registered in England - Number