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What is debtor finance?
'Debtor finance' refers to factoring and invoice discounting products - flexible facilities that allow cash to be borrowed against invoices raised on credit terms to commercial buyers in the UK and overseas.
back to top What is Factoring?
Factoring is a flexible way of improving cash flow, for all business types with gross sales of at least £50k pa. No other financial criteria apply.
The factor's involvement is disclosed to your customers and the factor undertakes credit management on your behalf.
Advances can be as high as 100% of outstanding invoices less than 90-120 days old. The facility cost is normally up to 3% over base rate for the money borrowed, together with a service charge linked to gross turnover of at least 0.5%, depending upon your business profile.
Some factors offer bad debt protection as part of the package (known as "non recourse factoring") so if a credit approved customer fails to pay an undisputed debt, the factor will credit you with the amount of the debt up to the agreed credit limit. This service normally increases the service charge by around 0.5%.
back to top What is confidential invoice discounting?
Confidential invoice discounting provides funding against UK and / or export invoices but is undisclosed to your customers and leaves credit management in your hands. As a result, it is very cost effective.
Unlike factoring, the discounters don't have direct control over their security (the invoices) and therefore prefer to provide facilities to well-established businesses with good systems, strong balance sheet and profit track record. Facilities are usually available when gross sales exceed £250k pa and where tangible or certified net worth is more than £25k.
The cost is normally up to 2.5% over base rate for the money borrowed, together with a service charge linked to gross turnover starting at 0.1% (subject normally to a minimum charge of £4k - £6k pa).
back to top Who can have debtor finance?
We can help secure facilities within a matter of days for almost any business that expects to have credit sales to commercial buyers of at least £50k pa including start ups - regardless of financial performance.
The key issue is whether your invoicing is sound. The simpler the product or service you supply, the happier the factors and discounters will be to provide a facility. More complicated debt can often be financed but you'll need to talk to the right funder - that's what we're here for.
back to top What can it do for my business?
Factoring and invoice discounting improve your cash flow by releasing money as soon as you've completed an order and raised an invoice, rather than having to wait for your customer to pay. Ideal for funding growth and can be strategically used to help finance corporate reconstructions, MBOs and MBIs.
Improved cash flow can create the confidence for you to tender for new business and start work on new orders without delay. You can settle bills promptly, improving supplier relationships and possibly securing early settlement discounts.
Because it's linked to sales, debtor finance is ideal if your business doesn't have the financial track record or security to negotiate sufficient overdraft facilities. This accessibility is often vital for new or growing businesses.
Another key advantage is flexibility. The amount you can borrow grows in line with sales and without the need for you to re-negotiate limits or pay arrangement fees. When combined with the higher advance rates generally applied by the factors, it's often possible for you to repay bank facilities and release previously pledged security. Some factors and discounters are also prepared to provide finance against other assets, or even unsecured loans, as part of a packaged solution.
Finally, factoring can provide you with a cost effective opportunity to sub-contract your sales ledger management.
back to top How much can I borrow?
Typically, at the outset you can borrow around 80% of the value of your approved outstanding sales ledger, based on invoices which are less than 90-120 days old. Thereafter, cash will be made available against invoices on a daily basis with the remaining 20%, less charges, paid over once the invoice has been settled.
You remain in charge of how much you borrow, although any disputed invoices, or those unpaid for more than 90-120 days, will not normally be available for funding. The level of advance you receive against invoices depends on a number of issues, but can rise as high as - 100%.
Once in place, there is no limit to the amount you can borrow as the finance is linked directly to sales. This is in sharp contrast to bank overdrafts, which require regular re-negotiation and arrangement fees.
back to top Glossary
Approved debts - the invoices that a lender is willing to lend against. This will exclude things such as disputed debts, retail sales and customers with a ban of assignment clause in their terms of sale.
Asset based lending - An advance against a mixture of business assets; debtors, stock, plant and machinery, land and buildings
Assignment - the legal process whereby the factoring company gains ownership of the money due from their clients' invoice.
Ban of assignment - where a customer refuses to allow a client to assign an invoice to a Factor
Factoring - An advance against unpaid sales invoices and full or partial credit management
High Involvement/concentration - Sometimes a customer makes up the lions share of a sales ledger. This customer is then said to be highly concentrated, and can lead to restricted funding depending on their creditworthiness, and the attitude of the lender
Invoice Discounting - An advance against unpaid sales invoices without any intervention in credit management. Usually confidential in nature.
IP (initial percentage) - The amount advanced against each invoice, typically up to 90%.
Non-recourse factoring - An element of credit insurance is included within the agreement protecting clients from bad debts and often protracted default.
Recourse factoring - The lender will fund invoices for a set period, typically 90-120 days. If the debt is not repaid at this point, any advance against that invoice will be withdrawn from the client.
Trade finance - Finance to help purchase goods from suppliers. Once a confirmed order from a creditworthy buyer exists, the trade finance company funds the required purchase from the supplier
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