Over the last few years, peoples awareness of invoice finance has grown rapidly. It is no longer seen as being “the last resort”, with general perception being far more positive now than it ever has been. So, what’s the difference, and what best for you?
Factoring, invoice discounting, confidential, ID, invoice finance, cash flow finance – the list goes on. These are all terms that are used to describe what is essentially the same thing – getting cash into your business quickly and efficiently. So, let’s have a look at the basics and compare invoice finance facilities.
Simply put, factoring is a way of raising finance against your entire sales ledger. With this facility, you typically assign your entire ledger to a factoring company who will then advance cash against it. The idea is that rather than waiting 30/60/90 + days to get paid by your debtors, you can draw down the cash as soon as you raise and assign the invoice, thus getting your cash flow moving. When you send a new invoice out, it will have an assignment notice on there with your factoring companies details on. With a factoring facility, you will also hand over the credit control to your factoring company as well, so you need to make sure you are comfortable with this. Typically you’ll be charged a set up, and admin fee, as well as a service fee (for the credit control and facility management) and interest rate for the funds you borrow. There may also be other fees in the background, so make sure you get a full breakdown of possible fees before entering into the facility, as this is sometimes a sore point. In fairness to the factoring industry, more companies are now offering fixed fee facilities which makes this clearer and easier.
Pretty similar to factoring really, but you have a bit more control of what is happening. You are still financing your entire sales ledger, but you look after your own credit control. Because of this though, your financier is more exposed and taking a bigger risk. You typically need to be running a well established company which is profitable, and have to be able to demonstrate your ability to effectively manage your credit control. Your debtors still know you are financing the invoices, but you have more control. The assignment notice is still added to invoices. The pricing for type of facility will in some way reflect the additional risk, but again expect to pay set up and admin fees, as well as your service and interest rate. Again, try to get a full list of potentially charges.
Confidential Invoice Discounting (CID)
Basically, this is the same as above except your debtors are not aware you’re are using an invoice finance facility. You do not put an assignment notice on your invoices, and as far as your debtors are concerned, it is business as usual. Obviously, this is the most risky facility as far as the lender is concerned as they have very little control, and are most open to fraud. Obviously, this increase in risk may be reflected in pricing and security required. As with invoice discounting, you need to have a good company with strong credit control and management systems in place.
For all the above facilities, you need to provide security. Directors will normally be asked to provide a personal guarantee, and a debenture will be taken. Some lenders may also ask for a charge against personal or commercial property if they feel the deal is risky. Typically you will also be tied into a long term contract.
As with all types of finance, it is about finding which type is going to be right for you and your business. You need to be thinking about the short and long term, the pro’s and con’s. If nothing else, hopefully this has at least explained what the fundamental differences are between the main types.
Of course, you may not need to finance your entire ledger. You may only need to raise cash for a short period of time, or only against a small part of your ledger. Being tied into a all encompassing, long term facility may not be the right thing for you. In these circumstances, a Selective Invoice Finance facility may be the best form of finance for you. This type of finance allows you to sell an invoice to Creative Capital, as and when you need to. It’s a short term facility allowing you to solve cash flow issues as and when you need to.
If you feel a Factoring or Invoicing Discounting facility is the right thing for you, then I would normally recommend you speak to a finance broker about what the best options are for you. They can help you compare invoice finance facilities, and identify which lenders would suit your business best. If you do not have a broker you work with, then your accountant may be able to help, or you could look on the NACFB web site (National Association of Commercial Finance Brokers) to find your local broker.
If you have any questions about anything you’ve read here, then feel free to pick up the phone and speak to a member of the team.