Factoring and Invoice Discounting A Discussion Document from Pegasus Funding Resources

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1 Factoring and Invoice Discounting A Discussion Document from Pegasus Funding Resources What is Invoice Finance? Many businesses these days can be well run and fundamentally sound, yet constantly suffer from a debilitating shortage of cash which can eventually lead to the breakdown of profitable trading. The fact that thousands of pounds may be due next month or the month after doesn't help when the wages have to be paid today, or when the VAT inspector, Inland Revenue, or trade creditors refuse to wait any longer. Expansion brings its own problems too. Stock levels have to increase, work in progress increases, and in particular a rapidly increasing amount of money becomes locked up in the sales ledger, waiting for customers to pay. In the meantime, your own suppliers are demanding payment for goods which you have now sold but for which the customers have not paid you. So cash difficulties are more or less inevitable. Financing customers on a monthly account, even if they all paid on time, can tie up an unacceptably large amount of a company's resources, so that the amount of working capital left for the real business of profit generation is severely limited. But as we all know, not all customers pay on time, so the pressures becomes even greater. Invoice Finance relieves this pressure by providing immediate finance which is automatically geared to turnover and is not normally dependent upon whether you are willing or able to provide collateral security. All businesses need a reliable source of working capital and a way of alleviating the difficulties that result from late payment. Funding must be directly linked to the performance of the business, providing working capital that grows as the business grows. Invoice finance can improve your cash flow by providing flexible finance linked directly to your sales, ensuring continued stability and growth for your business. The Benefits No more cash flow headaches, leaving you free to concentrate on growing your business.

2 Obtain 'Cash on Delivery' - and still give your customers the credit terms they have always enjoyed Restrictive overdrafts need never be a problem again. Improve return on your capital. Your business is unique. It needs an individually tailored cash flow solution, geared to provide your company with the working capital you need to flourish. Types of Invoice Finance Invoice Discounting For established businesses, Invoice Discounting is the key. The business continues to receive customer's payments, manage their own sales ledger and credit control activities. A prepayment facility on invoices of up to 80% and the balance when a customer pays. There are two options available: Confidential Confidential Discounting is provided for established profitable companies with a strong balance sheet and the arrangement is not disclosed to customers. Disclosed This service is provided for those companies whose balance sheets are not so strong, and the finance company s involvement is disclosed to customers. For many clients this facility develops into a Confidential arrangement, as the benefits of consistent cash flow take effect and profitable expansion gets underway. Full Service Factoring The main difference from Invoice Discounting is that the factor takes over responsibility for running the sales ledger and handles collection. There are two options available: Recourse Factoring The same prepayment facility as with Invoice Discounting, without the burden of running the sales ledger, but with the knowledge that cash flow will be safeguarded through effective but sensitive supervision and collection. Considerable savings can be made in administration costs, such as sales accounting, stationery, postage, telephone charges, computer systems,

3 staff time and other associated costs, by the finance company looking after customer accounts through state-of-the-art computerised accounting systems. Non-Recourse Factoring with Bad Debt Protection All the benefits as Factoring and Invoice Discounting such as immediate advance of up to 80% of the face value of the invoice - with the balance when the customer pays - with the added advantage of 100% Bad Debt Protection. We all recognise that bad debts have a crippling effect on business, but credit protection schemes will alleviate the worries. Cost Saving Example The costs of Invoice Finance are within the reach of many small businesses, being outweighed by savings and benefits. Here is a practical example which may clarify these savings: Company Turnover 1million Active Accounts: 125 Average Invoice Value: 550 Factoring Service Fee: 10,000 Compare this to the estimated annual costs of running the sales ledger in house: Debtor Statements 125 per month including post, stationery and envelopes = 1,500 x 50p 750 Follow-up letters 50 per month = 600@ 50p 300 Telephone costs collections, sales ledger, administration, details of payment (approx) 250 Solicitors costs assuming no more than 3 final letters per 10 each 360 Litigation costs 1,000 Bank Charges cheques per 67p 1, counter credits per 67p bounced cheque per month Staff costs 1 person on 9,000 salary per annum, spending 3 hours a day on the banking of cash, updating of sales ledger, customer contact, dunning letters, telephone collections 4,485 Management time - say 5 hours per week total 3,900 Total 12,214 + SAVINGS (detailed below) 13,050

4 Notes: The calculation is based on actual working examples. It takes into consideration the management and staff time customarily allocated to the preparation of a sales ledger of this kind. In calculating staff and management time, the normal costs of National Insurance, pension contributions and medical insurance have not been allowed for. Average outstanding invoices are assumed as 200,000 Not only can the savings effectively create a facility at no additional cost - using the finance company s own credit controllers will provide all year round credit control regardless of holidays and illness. The savings are substantially greater than this because the example calculation does not include: Reducing your bank interest costs by collecting your debts faster (10-15) Saving 1,800 The costs of obtaining credit information from another source Saving 250 Additional cash discounts from suppliers for prompt payment Saving 7,500 Better allocation of management time Saving 2,000 Possibility of reduced cost of money compared to normal Bank Finance Saving 500 Reduction in staff generated costs. Savings on holiday pay national insurance etc. Saving 1,000 The 'Needs' Matrix Total: 13,050 This matrix summarises the relationship between the various services and the stages at which companies may benefit from invoice finance support. Stage New Business Lively, strong drive for growth, great enthusiasm but limited experience Corporate needs Funds for growth. Sales Ledger Support/Admin Security Relevant support services Factoring with Bad Debt Protection

5 Development Business now has a foothold in the market - seeking opportunities to develop products and markets Strong Growth Management know they have a winning product and can push hard for growth Consolidation Managers wish to develop successful enterprise to a higher and more rewarding level Strong cash flow improved administration, Strong cashflow, less need for administration Healthy cashflow and invesigation of other forms of funding Factoring with or without Bad Debt Protection Disclosed Invoice Discounting Invoice Discounting Confidential Invoice Discounting, potential MBO support Merchant Banking