Invoice finance made simple

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1 Invoice finance made simple All you need to keep the cash flowing Your Invoice Finance Experts Your Invoice Finance Experts

2 Contents This informative, easy-to-use guide has been put together to explain how invoice finance works and how it could help keep your business moving forward. Invoice finance explained 4 Advantages of invoice finance 5 How factoring and invoice discounting work 6 7 Who is suitable? 8 What it costs 9 Signing up to an invoice finance facility a step-by-step guide Frequently asked questions Glossary Invoice finance Your cashflow finance solution Keeping the cash flowing is the most important part of any business, even more so in a recovering economy. After all, accessing the money you re owed allows you to grab new opportunities, bring plans to life, buy new equipment, pay staff wages and negotiate the best terms with your suppliers. Unfortunately, maintaining a regular flow of cash is often easier said than done. Especially if late payments are holding you back. It s estimated that late payments are costing UK businesses as much as 1.9 billion a year. If your business is selling its products or services to other businesses on credit terms, invoice finance, often known as factoring and invoice discounting, could help. It s a form of funding that releases cash tied up in a business outstanding sales invoices. Over 41,000 businesses across the UK use invoice finance to support them at various stages in their business life cycle. More and more businesses across the UK are using this form of finance particularly at a time when more traditional financial institutions have been turning down funding requests. Choosing the right invoice finance provider 18 DID YOU KNOW? Around 15.8 billion of funding is being injected into UK businesses via invoice finance solutions. It s predicted this form of funding will continue to grow in the long-term as the UK economy continues to improve. 2 3

3 Invoice finance explained Invoice finance takes two main forms factoring and invoice discounting. The different benefits provided by these services are listed below. What is factoring? Factoring is a flexible funding and collections service which releases cash tied up in outstanding customer invoices. What this means: You can bridge the cashflow gap between raising an invoice and getting paid. You can boost your cashflow by receiving an immediate cash injection and ongoing supply of working capital into your business against the value of your outstanding invoices. You can benefit from the factoring provider s credit control service, saving you valuable time, as they will chase and collect outstanding invoice payments on your behalf. What is invoice discounting? Invoice discounting is a flexible funding-only solution which releases cash tied up in outstanding customer invoices. What this means: You can bridge the cashflow gap between raising an invoice and getting paid. You can boost your cashflow by receiving an immediate cash injection and ongoing supply of working capital into your business against the value of your outstanding invoices. You maintain the relationship with your customers and you collect payments against outstanding invoices the invoice discounter provides the cash to support you. Unlike factoring, invoice discounting does not include a credit control service. DID YOU KNOW? Over 41,000 companies use invoice finance.* In fact, businesses have been using this type of funding for over 40 years. Advantages of invoice finance There are a number of advantages that invoice finance offers over other funding options. A secure form of finance the sales ledger is used to secure access to funds, so as your business grows so does the amount of funds that can be made available to you. Access to specialist expertise invoice financiers take an in-depth view of your business this includes taking into account the entire financial picture when making a funding decision. It s finance that grows with you you get an immediate cash injection and an ongoing source of funding linked directly to current sales. As business grows and sales increase, so does the amount of working capital that the invoice financier can make available. Improve your profitability paying suppliers early lets you buy in larger quantities and take advantage of any volume discounts available. An extensive credit history is not required in the UK the sales ledger of the business is used to secure access to funds. This means those businesses which may have been turned down for bank funding have a viable and trusted funding option. Will I lose control of my customer relationships if I use factoring? No, an invoice financier will provide a dedicated credit controller who, in effect, becomes an extension of your own team; chasing and collecting payment in the way that you want them to. Many providers can also offer a confidential facility, where your customers would remain unaware of how you are funding your business. 4 *Source ABFA Quarterly Statistics. 5

4 How factoring and invoice discounting work By releasing funds tied up in outstanding customer invoices, factoring and invoice discounting gives you an immediate cash injection and an ongoing supply of cash that grows in line with your sales. Simple steps to unleashing your cashflow: Factoring Invoice discounting You You invoice your customers for goods and services and send details of the sales invoice to the factoring provider. You You invoice your customers for goods and services, and send details of the sales invoice to the invoice discounting provider. Factoring provider On receipt of your invoice, the factoring provider will typically release up to 85% of its value within 24 hours of it being raised, minus a small fee. The remaining 15% is held until the invoice is paid. They will undertake credit control and collections on your behalf. This includes sending out statements and chasing customers until invoices are paid. Invoice discounting provider On receipt of your invoice, the invoice discounting provider will typically release up to 85% of its value within 24 hours of it being raised, minus a small fee. You You chase payment of the invoice. Customer Your customer pays factoring provider in full. Customer Your customer makes payment into a dedicated trust account. Factoring provider The factoring provider will now release the remaining 15% of the invoice value. Invoice discounting provider The invoice discounting provider will now release the remaining 15% of the invoice value. 6 7

5 What it costs Compared with other types of business finance, invoice finance is a cost effective solution, and when compared with bank funding, the cost of money advanced is competitive. Although in general terms, fees are tailored to the specific needs of businesses and therefore differ from firm to firm. There are two types of fee: Who is suitable? Whether your business is large or small, long-established or fledgling, liquid or experiencing cashflow difficulties, you could benefit from the significant advantages invoice finance offers. Service This covers the day-to-day running of the sales ledger (usually between 0.5% and 3.0% of the turnover assigned). Cost of funds This is charged on the monies advanced to you. Invoice finance is perfect for: Fast-growing firms lacking the capital resources and cashflow to fund expansion plans. Start-up businesses and young companies with a turnover of at least 50,000 per annum (all funding decisions are based on the strength of current sales ledger and not past trading performance). Larger businesses looking to fund a range of major transactions such as Management Buy-Outs (MBOs) and mergers and acquisitions. Those businesses that have cashflow difficulties or who have been the victim of late payment. You could also benefit from: Savings on people costs Invoice financiers can provide credit control functions on your behalf as part of their factoring service, so businesses can make savings on the cost of employing a credit controller, typically saving the business between 15K to 20K per annum.* Significant savings on costly overheads such as postage, stationery and telephone calls. A healthier bank balance Invoices are paid on time and more quickly. With a regular flow of cash into your account, it means you could save on bank interest and charges. Whilst start-up businesses may initially use factoring to improve their cashflow, as they grow and become more established, they may consider invoice discounting, which provides all the benefits of factoring, without the credit control. *Source cmrecruit.com 8 9

6 Signing up to an invoice finance deal step-by-step Step 1 The enquiry Enquiry stage. This gives the invoice finance provider an opportunity to capture some basic information and gain a better understanding of how your business operates, and evaluates your requirements to see if you can benefit from an invoice finance service. Step 2 The meeting Sales manager call/visit. The invoice finance provider will come and talk to you about your business, undertake a short business health-check, and gather some documents so that an offer can be made. To build as complete a picture of your business as possible, the financier will look at: The financial picture. Invoice financiers will typically look at actual and forecasted turnover, profit and loss, and net worth. Don t worry if some of these elements are negative, an invoice financier may still be able to help. How your business trades. One of the main reasons for non payment will be a dispute over the invoice. An invoice finance provider will look to understand the paper trail such as order confirmations, proof of delivery, time sheets and good communication of clearly defined payment terms. If you do not have these in place, some invoice financiers can make recommendations for best practice. DID YOU KNOW? Your key customers. Any invoice finance provider will want to know details of your customers to assess their credit worthiness. This allows the level of funding to be determined correctly. Some Invoice Financiers also provide specialist funding solutions and support for various other industry sectors including Import and Export, Recruitment and Construction. The management team. An invoice financier will want to understand more about the owners qualifications, experience, history of previous business failures etc. Any previous failure on the part of a director are not necessarily a bar to eligibility, many invoice financiers support those who have been the victim of a failed business in the past. Other sources of finance. The invoice financier will want to understand if any other funders are supporting your business. They will need to register their interest in the book debt at company s house allowing them to be the sole funder of your invoices. This is known as a debenture. To move to the next stage some paperwork will also be needed from you: Data protection form allows searches to be taken against the individuals listed. Proof of ID such as driving licence or passport. Sales/debtor ledger searches may be undertaken, for internal use only, on your customers with external agencies to establish credit worthiness and the amount of funding that can be made available. Copy of invoices. Step 3 The offer This can be written or verbal and may be made whilst the manager is on their visit. The offer will outline: The facility being offered How much money can be made available How much the facility will cost What documentation will be required to get the facility up and running. The personal guarantees required this is a standard request for most types of finance and is a commitment by you and assurance to the invoice finance provider, that the signed agreement will be honoured by you. On your acceptance the invoice financier will then process the application so that facility documents/legal documents can be raised

7 Step 4 Setting up the facility Once the relevant documentation is signed, the following will take place: Facility documents are processed onto the system by the invoice financier. The debenture is registered. Details of your customer accounts are set up on the system this can sometimes be migrated automatically from your accounting system, depending on the system used. Invoice verification will take place. This is essentially an audit of the sales ledger. The invoice financier will speak to your customers this allows them to reconcile your account, (this can be done on a confidential or disclosed basis). The invoice financier will address any disputes or issues that may arise and can help you to resolve if there is a problem. The more invoices that are reconciled, the more funding can be made available. Sometimes the offer from the invoice financier will change based on the successful reconciliation of invoices. The agreement will outline costs, the standard terms and conditions of the facility, how much money will be made available, how it will be run, and the terms of working together. Once the contract is signed the facility will then be set up. Remember to seek advice/guidance before signing any documentation. DID YOU KNOW? The personal guarantee is a standard request for most types of finance. It s a commitment by you and assurance to the invoice finance provider, that the signed agreement will be honoured by you. Frequently asked questions Dispelling some of the common myths surrounding this form of funding. 1. Will my customers think my business is in difficulty? Many businesses worry that their customers will be concerned when they find out they are using an invoice finance provider. With over 41,500 businesses using this form of funding at all stages of their business lifecycle, there is actually no need for your customers to be worried. Many providers now offer a confidential option, so your customers will be unaware of how you are funding your business. 2. Is it expensive? Invoice finance is certainly cost effective compared to other types of business finance. Compared to bank funds, the cost of money advanced through invoice finance is competitive. What is often forgotten in a straight comparison of charges is that businesses using invoice finance facilities benefit from significant related savings on a number of costly overheads, such as the cost of employing a credit controller, postage, stationery and telephone calls. And because invoice finance clients do not have to wait for invoices to be paid, they benefit from healthier bank balances, and save on bank interest charges. 3. Is there lots of paperwork? All financial agreements involve a certain degree of paperwork at the onset, to ensure that whatever facility is offered is right for your business. Once a facility is in place an invoice finance provider will actually remove some of the administrative burden placed on your business through the management of your credit control. Information is also available online to help you understand the day-to-day state of your sales ledger. 4. What percentage of my invoices are released upfront? As each facility is tailored to a business own needs, this will vary. Generally though, an invoice finance facility will release anything up to 85% of the value of outstanding invoices as you issue them

8 5. Do I only end up with 85% of the value of my invoices? No. The 85% is released within 24 hours of invoices being processed, less a small fee. The remaining 15% is held until the invoice is paid in full and is then released to you. 6. How soon after sending an invoice can I access my money? Again, this can vary from provider to provider but typically funds can be made available within 24 hours of an invoice being received. However, some providers are able to make same day payments. 7. Do you credit check my customers? Many providers will conduct credit checks as part of the service they provide. This is especially important where one customer makes up the majority of work that you do. 8. What incentive does the invoice financier have to collect my invoices? The invoice financier has already advanced a percentage of the invoice value to you, so it s in their interest to collect the payment from your customer. Invoice finance teams want to achieve good results for their clients. Like any business if they fail to provide a good all-round service, their clients would be dissatisfied and leave. 9. What if I don t want the invoice financier to chase my invoices? Many businesses still wish to perform their own credit control services, so if you already have a strong system in place then you may want to consider the funding-only service, which is called invoice discounting. This means you can continue to chase your customers for payment. 10. Do invoice finance companies stop funding an invoice after 90 days? Generally, if a provider has been unable to collect payment against an invoice, maybe due to insolvency or a dispute, they will usually remove funding against the invoice but continue to perform the administration on your behalf. In some circumstances the invoice will be reassigned back to you. If a business is concerned about its customers or their ability to pay it may wish to protect against non payment by taking bad debt protection. 11. How long will it take to put a facility in place? Typically a facility can be set up in seven to ten days, but it can be quicker, it s really down to how quickly you can provide information to your invoice financier. 12. How long are invoice finance contracts? Invoice finance is used on both a short term (e.g. 3 to 6 months) and long term basis, depending on the client s needs; some have used it for 10 years or more. There are some short term contracts available so businesses can test the service/facility before committing to a longer term contract. 13. If things go bad, will you use my security against me? Some people are concerned about supplying personal guarantees, but this is a standard request for most types of finance and is a commitment by you and assurance to the finance provider, that the signed agreement will be honoured by you. Invoice finance providers are in it for the long haul and nobody wants to enforce a personal guarantee. If the business is trading as it should and is in accordance with the invoice finance agreement, there should be no requirement to use the personal guarantee

9 Glossary Throughout this guide we have tried to avoid the use of jargon. However, we have provided a quick glossary of terms should you come across any of these when dealing with an invoice finance provider. Advance This is the percentage of the invoice value that will be made available to you. Approved Debt The invoice financier will take the value of the invoices you send to them and then reduce it by the level of disapprovals. This can include things such as aged invoices, disputes or exceeded credit limits. The amount left is your approved debt. Assignment When an invoice is raised and sent to the invoice financier it is effectively sold to them, otherwise known as assigned to. Audit A review carried out by the invoice financier to ensure that the conditions of your agreement are being met. Availability Relates to the amount of funding that you have available to use at a point in time. Bad Debt Protection A facility that protects your business against a possible bad debt. Collections These are the payments the invoice financer receives from your customers/debtors. Concentration Limit The level, often expressed as a percentage, to which the invoice financier will fund one single customer of your total approved debt. Contra A contra is where two companies are both suppliers and customers of each other. Cover Limit The amount of bad debt protection provided by the invoice financier against each of your individual customers. Credit Limits The funding limit that is placed on each of your customers. Current Account The total amount of funds paid to you including any charges at any given time. Debtor Your customer. Disapproval Is a collective term covering any reason why an invoice has not been funded e.g. due to age, credit limits, contras, disputes etc. Disbursement A charge made for any service provided which is not covered by the service or cost of funds charge. Examples include charges for same day transfers, solicitor letters etc. Discount Fee Also known as cost of funds. This is charged on the monies advanced to you. Dispute If a customer is not going to pay an invoice it will be classed as a dispute. Export Debt The amount of money owing to you from an overseas customer. Factoring Fee A charge made for the administration of your sales ledger, collections and the processing of invoices. This can also be referred to as a service fee. Funding Limit This is your borrowing limit agreed at the outset of the agreement. This can be changed during the course of the relationship. Funding Period 90 days date of invoice to 90 days end of month. High Involvement Please refer to concentration limit. Payments A payment is the monies that are advanced to you. Pre Payment Also known as an advance. This is the percentage figure that is available the day following receipt of your invoices. Reassignment If a debt becomes uncollectable for whatever reason e.g. a debtor goes into liquidation then the debt can be reassigned to you. Sales Ledger A record of all monies outstanding from your customers. Verification This is essentially an audit of the account. The invoice financier will contact your customers on a random basis to ensure goods and services have been delivered and performed to your customer s satisfaction. Customer Your debtor

10 You now know the basics about invoice finance If you have any questions, or think you may need a little help: Choosing the right provider When considering a new relationship with an invoice finance provider, it s important to choose one who understands you, your business and the sector you work in and can use that level of expertise to offer you the best possible solution. Below is a list of considerations for any business, before choosing an invoice finance provider. Are they a member of The Asset Based Finance Association (ABFA) the industry trade body? What proof is there that the invoice financier is financially stable? What percentage of your invoices will be disapproved by the invoice financier and therefore not funded? Who will look after your account and do you have access to the decision-makers? Will the invoice financier chase all your customers or only a percentage of them? Can the invoice financier manage complex or contractual debt? Does the invoice financier have the capability to fund and manage international debt? How will the invoice financier communicate with your customers by phone, mail, or all? Will any existing overdraft arrangements be affected? How will they work with your customers? Are there any hidden charges? Freeing up your cashflow Managing late payment Handling a potential bad debt Making the most of overseas trade Why not get in touch with the specialist invoice finance provider? Do business with the best We re currently helping more than 3,900 businesses across the UK. Over 90% client satisfaction levels year after year. 14 local offices to give you access to decision makers when you need them. Quick decisions to keep your cash flowing. Specialist finance solutions available for recruitment, construction and those involved in import and export trade. We re the largest independent invoice finance company in the UK. We re a secure and stable invoice finance provider with over 27 years experience. We can provide a level of expertise and tailored support that traditional funding providers often can t match. We re Best Factor and Discounter 2010, 2009 & 2008 winners. Thousands have already unleashed their cashflow. You could be next. Visit Your Invoice Finance Experts 18 19

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