2 Agenda Introduction ABFA Jargon Busting What is Invoice Finance Factoring Invoice Discounting Invoice Finance Products Who uses Invoice Finance? Main terms Advantages & Disadvantages Risk to Invoice Financier & Client Operating an Invoice Finance facility Case Study
3 Introduction Liam Baker Business Development Manager
4 ABFA Asset Based Finance Association - Voluntary trade association - Who are members? - Provides process for member inter-factor transfer* - Code of Conduct July 2013 Banks v Independent Financiers - How do they differ in the market? For more information, visit
5 Jargon Busting! The Invoice Finance industry is full of jargon How much of it would you be able to explain and understand?
6 What is Invoice Finance? Generates cash against unpaid invoices The most common facilities are Factoring and Invoice Discounting There are many other alternative invoice finance facilities.
7 What is Invoice Finance?
8 Invoice Finance Explained Step 1 The client invoices the debtor for goods sold. Client sends a copy of the invoice to the Invoice Financier. Service fee is deducted. Invoice Financier INVOICE Debtor COPY INVOICE Client
9 Invoice Finance Explained Step 2 Invoice Financier typically give the client up to 90% of the value of the invoice immediately. Invoice Financier 90% Debtor Client
10 Invoice Finance Explained Step 3 Invoice Financier can chase invoice payment from the debtor or the client may opt to chase themselves. Invoice Financier INVOICE CHASE Debtor Client
11 Invoice Finance Explained Step 4 The debtor pays the Invoice Financier the amount on the invoice in full either direct or into a trust account. Invoice Financier 100% Debtor Client
12 Invoice Finance Explained Step 5 Invoice Financier gives the client the remaining 10% Invoice Financier 10% Debtor Client
13 Invoice Finance Explained Invoice Finance Invoice Discounting Factoring Confidential Agency / CHOCC s Recruitment Finance Export Finance Bad Debt Protection International Collections Disclosed Purchase Funding Body Shop Finance Trade Finance
14 Factoring Explained There are a number of benefits which include: - Up to 90% cash injection into business - Full credit control and sales ledger management - Relevant, timely letters and statements to customers - Disclosed or confidential credit control function - Allocation of customer payments - Bad debt protection is available.
15 Invoice Discounting Explained Different to Factoring in that the client retains control of their sales ledger management and credit control activity. Benefits Include: - Client receives up to 90% advance of invoice value - Freedom for business to retain control of their sales ledger - Invoices financed can be domestic or export sales - Bad debt protection available - Typically a confidential facility.
16 Invoice Discounting Criteria Due to reliance on the client to perform essential activity, this product is suitable for: - Growing, profitable companies - Good internal systems and controls - Own Credit Control operation - Well maintained Sales Ledger - Good debt turn in relation to the industry - Accurate and timely management accounts.
17 Available Invoice Finance Products Contractual Finance Revolving Credit Confidential Trade Finance Spot Factoring Body Shop Finance Agency / CHOCC s Non Recourse / BDP Reverse Factoring Purchase Funding Export Finance Recruitment Finance
18 Who Uses Invoice Finance? Business Structures Key Sectors SOLE TRADER PARTNERSHIP LLP s LIMITED COMPANY PLC S Haulage Manufacturing Construction Services
19 Who Uses Invoice Finance? Businesses trading B2B From new starts to mature businesses Trading on credit terms Ideally Sell and Forget
20 Main Terms of an IF Agreement 1. Service charge (usually % of turnover) 2. Discount Charge - % above LIBOR/BASE 3. Prepayment % 4. Contract period (term + notice period) 5. Security required 6. Operating conditions / pre coms 7. Termination Fees 8. Inter Factor Transfer Process
21 Advantages & Disadvantages
22 IF vs. Overdraft What other benefits does IF provide which an Overdraft does not? - Service (i.e. credit control) - Flexibility - Lending criteria/reporting - Collateral security - Route during exit scenario (book debts) - Not repayable on demand
23 The Cash Benefit CASHFLOW WITHOUT INVOICE FINANCE Income Oct Nov Dec Jan Feb Mar Sales (invoices raised) Cash In* Total Income Total Expenditure Cash Balance c/f CASHFLOW WITH INVOICE FINANCE Income Oct Nov Dec Jan Feb Mar Sales (invoices raised) Cash In* Total Income Total Expenditure Cash Balance c/f
24 Risk to Invoice Financier / Client Unintentional and deliberate actions that may present risk to the invoice financier or client.
25 Risk to Invoice Financier / Client Unintentional Contra Trading Rebates Discounts Free Issue Material Liquidated Damages Concentrations & Debtor Quality Ban on Assignment Bad Debt/ adverse credit Appears on both debtor and creditor ledgers Retrospective charges made by the debtor, usually for volume Up front or retrospective Debtor supplies stock to client Potential non payment through breach of contract. Spread of exposure Debtor doesn t recognise factor
26 Risk to Invoice Financier Deliberate False Invoices Pre-invoicing Re-aging/Rolling Invoices No debt to collect - FRAUD Invoicing ahead of completion of contract of sale Crediting and reissue of aged or unapproved invoices Credit Note Suppression Banking of Receipts Collusion Funding non existent debt Client banks monies due to invoice financier Debtor collaborates with client
27 Operating an Invoice Finance Facility Operational Relationships Operating Platforms and Client Reports Client Reporting Availability Movement Additional Services and associated Costs Variations to Agreement
28 How the client receives money 1. Contract to an agreed prepayment % 2. Industry / Risk / Commercially driven % 3. Availability is calculated 4. Draw down (online system)
29 How the client receives money Contract to an agreed prepayment % Industry/Risk/Commercially driven % Availability is calculated Draw down online system How is the availability calculated?
30 You as the Client How can a facility be structured for you?
31 Learning Points - ABFA - Jargon Busting - What is Invoice Finance - Main Terms of an Invoice Finance agreement/ the offer letter - Suitability for Invoice Finance - Advantages & Disadvantages of an Invoice Finance facility - Invoice Finance v Overdraft - Risk to an Invoice Financier/Client - Operating an Invoice Finance facility
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