2 INVOICE DISCOUNTING, FACTORING & SALES LEDGER MANAGEMENT Selling your sales Invoices or outsourcing your sales ledger is one of the most complex techniques for business finance. Unfortunately, it is often the most missold aside from interest rate and foreign currency hedging. L&EI offer expertise in all aspects of sales ledger management and financing in a totally impartial manner. That is why we have outlined greater detail of information on the website than usual. Factoring involves selling your invoices to a third party. In return they will process the invoices and allow you to draw funds against the money owed by your clients. Essentially, these companies provide a finance, debt collection and ledger management service. It is commonly used by businesses to improve cash flow but can also be used to reduce administration overheads. Invoice discounting is an alternative way of drawing money against your invoices. However, you retain control over the administration of your sales ledger. As well as providing finance, it can offer support services and credit insurance.
3 How factoring works. Factoring provides a fast advance against your sales ledger. It allows you to flexibly increase your working capital and improve cash flow by effectively selling your unpaid invoices to a factoring company. Factoring is offered to businesses trading with other businesses. It is not normally available to retailers or to cash traders. When factoring starts After signing an agreement, the factor will typically agree to an immediate advance of up to 85 per cent of approved invoices, the balance paid when the debtor pays the debt. The initial payment is usually made available within 24 hours. Usually all sales go through the factor. Check the notice period to the end of the service - most factors require three months' notice, but some require longer. Factoring is more complex than some other forms of funding. And you should take professional advice before using factoring for the first time.
4 Advantages and disadvantages of factoring There are advantages to factoring, but also some potential drawbacks, as with any type of funding, but not so clear with factoring. Advantages Factoring provides a large and quick boost to cash flow. This may be very valuable for businesses that are short of working capital. A business that is owed 500,000 may be able to get 400,000 or more in just a few days. It can be a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business. It assists smoother cash flow and financial planning. Some customers may respect factors and pay more quickly. Factors may give you useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers. Factors can prove an excellent strategic - as well as financial - resource when planning business growth. Businesses will be protected from bad debts if you choose nonrecourse factoring. Monies are released as soon as orders are invoiced and are available for capital investment and funding of your next orders
5 Disadvantages Queries and disputes may have to be referred on and may have a negative impact on your available funding. For this reason, factoring works best when a business is efficient and there are few disputes and queries, which nature of the comment is self defeating. The cost will mean a reduction in your profit margin on each order or service fulfilment. It may reduce the scope for other borrowing - book debts will not be available as security. Factors will restrict funding against poor quality debtors or poor debtor spread, so you will need to manage these funding fluctuations. To end an arrangement with a factor you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet. This may require some business planning. Some customers may prefer to deal directly with you. How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation.
6 Invoice discounting Invoice discounting is an alternative way of drawing money against your invoices that allows you to retain control over your sales ledger. It can provide a cost-effective way to improve your cash flow. However, it may not necessarily be the cheapest form of finance available and can tie you into a long contract. How it works Invoice discounting provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cash flow. The invoice discounter will want to visit your business, review your finances and study your business plan to evaluate your suitability for invoice discounting. They will also regularly check that your business procedures are effective. You will pay a fee to the invoice discounter, usually a percentage of the value of the invoices or an agreed fixed fee and discount (interest) on the net amount advanced. They will be notified of the invoice details electronically - through downloads of sales day books or invoice listings. Once they receive notification, the invoice discounter will make funds available at the agreed percentage rate, which you can then use as required. As cash is received from debtors, it is paid to the invoice discounter, reducing the outstanding balance and making the remaining amount available.
7 The cost of Factoring and Invoice Discounting The costs of factoring and invoice discounting can change depending on the company offering the service, and are negotiable by expert financial negotiators. discount charges (interest) offered service or management fees any additional costs - services such as credit protection notice period for ending the service - most providers require three months' notice, but some have notice periods of up to a year which could be expensive for your business Discount charges Discount charges work in exactly the same way as bank interest. The discount charge is calculated on a daily basis and usually applied monthly. Credit management fees There will be a fee for credit management and administration. The amount will depend on your turnover, the volume of your invoices and the number of customers you have. For invoice discounting, fees are typically lower than for factoring because you will still collect and manage debts yourself. These fees are less because the level of service provided is significantly lower than with factoring.
8 Export Factoring Some factoring companies offer a facility for the financing of international sales. They will typically work with a partner abroad who will be responsible for the collection of payment in the country to which you export. The services of a local agent will prevent any problems that could arise because of differences in laws, customs, language and time differences. In terms of credit limits and process, there is no material difference between local and international factoring. Some factors will offer you the choice of being paid in sterling or in another currency. We evaluate which is to your advantage. If your customer insists on being invoiced in their country's currency, consider investing in protection against currency fluctuations. Factors may approve a lower level of prepayment for export invoices than for local sales. Questions we know how to ask What is the funding provider's record in collecting debts quickly and efficiently? How exactly does the provider operate? What are the procedures in detail and do they suit you? How does the provider handle disputes and queries?
9 As the factor will become an 'insider' and be in frequent contact with you and your staff, do you see eye to eye on issues that are key to your business? Do you have a good initial rapport? Does the provider have experience of your industry? How is the provider likely to communicate with your customers (if it is a disclosed arrangement)? You should agree a general customer service policy with them to ensure they will not alienate your customers. limit? What will happen if a customer goes over the credit What happens if you want to end the agreement? What period of notice must you give? Most providers require three months' notice, but some have notice periods of up to a year which could be expensive for your business. SALES LEDGER MANAGEMENT As part of our integrated outsourcing offering, we arrange for clients a fully managed sales ledger function that is completely tailored to their requirements, ensuring that your business is able to monitor and collect its debts, whilst remaining on the best of terms with its customers.
10 Cash flow is vital, especially in times of economic uncertainty, and we understand that it can often be difficult to keep on top of debt collection whilst also trying to run your business. By opting to use our sales ledger management service, we can ease this burden by supplying you with all the information and support you need to collect your debts on time. We can also raise sales invoices on your behalf if required. Using the information maintained by the bookkeeping team, we will provide you with regular debtor reports, showing the age of the outstanding debts. We will also send out statements on your behalf to your customers to remind them of the balances due. If required, we are able to then provide a credit control service by sending out a pre- approved sequence of reminder letters at agreed intervals. By taking this approach we are able to maximise our clients working capital and ensure that bad debts are kept to a minimum. To initiate a confidential discussion, please
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