1. A Short Practical GuideInvoice Factoring

2. Introduction Perhaps the term cash flow finance or working capitalfinance is a better way of describing what InvoiceFactoring or Invoice Discounting is all about. Firstly, if you are looking at this article, you shouldunderstand that you are not alone in your search forgrowth capital for your business. Most surveys that askSME business owners to identify the biggest needs fortheir business get the following response:1. Help to increase sales2. Help to get more working capital The reluctance of the main banks in the UK to assist smallbusiness is well documented and despite assertions to thecontrary, the stark reality is that the SME sector is stillstruggling to identify and obtain the working capital that isrequired for growth. 3. Explanation What is invoice factoring? Factoring essentially means that you sell yoursales invoices to a third party. The third party (Invoice Factor) thencollects the debt and remits the proceeds to you after deducting theirservice charges and interest on any advances that they have made. It is helpful to think about the factoring arrangement in the followingmanner. The current account is like a bank overdraft in that you arecharged a facility fee and interest. The benefit of this facility is the speedwith which you can access cash. For example, if you raise an invoicetoday, in the normal course of trading, you may have to wait for 30 or 60days before you receive a cheque in the post. You may then have towait a further 5 working days before the banked cheque clears. In themeantime you have demands on your working capital every day. If you have an invoice factoring arrangement you can normally drawfunds down by bank transfer within 2 working days or, in certaincircumstances, within 24 hours of assigning an invoice to the InvoiceFactor. 4. What is the Cost? Invoice Factors will clearly state the charges that will belevied for discounting the invoices. This discount is thepercentage that the Invoice Factors earn for providing theservice. This may range from 1% to 3% (in most cases)and must be considered very carefully when you areworking on low margins. It is important to ask at this stage is what is the cost of nothaving a factoring facility. The following scenario willillustrate this point. Suppose that you have received anorder to be fulfilled in ten weeks from today. The next weekyou receive a call from a supplier offering you 50%discount on the precise materials that you need formeeting the order. This discount represents a saving of4,000 based upon the normal price that you would pay.What is the cost of NOT having a factoring facility now? 5. How does the money work? You assign your invoice(s) to the Invoice Factor The Invoice Factor applies the agreed discounting charge You request an advance against the invoice(s). This is normallyrequested electronically and your available funds will be regularlyupdated (normally on an internet based system) This initial advance will be based upon a percentage of the grossinvoice value (typically 80%) and will be included in the Invoice Factorsagreement with you The Invoice Factor calculates your entitlement and transfers the cashand allocates this to your current account All cheques/remittances from your customers should now be madepayable to a collection account as specified by the Invoice Factor Your Invoice Factor will issue statements to your customers and collectany overdue amounts When your customers pay, the Invoice Factor will credit your currentaccount with the proceeds and the remaining balance due to you willappear on your available funds statement 6. Common Misunderstandings Some people think that because the initial advance is 80% of the gross invoicevalue, that they are being charged 20% for getting the cash early. This is totallyincorrect. The charge for discounting would not normally exceed 3% and this willalways be in accordance with the terms set out in your agreement Sometimes over enthusiastic sales personnel fail to explain fully some of thepractical issues that may restrict the amount of funds that may be available foryou to draw upon. Typically these restrictions surround sales concentration andcustomer queries/disputes. Concentration basically means that Invoice Factorsdo not like you having all your eggs in one basket which means that they like tosee a sales ledger that is evenly spread over a good number of customers. TheInvoice Factor may state that they would restrict any one customer to 30% of theoverall ledger. This must be carefully considered at the outset and the salespersonnel should be tackled on this point to address any issues that maysubsequently arise. Customer queries/disputes must be dealt with promptly otherwise the amount ofthe invoice will be disallowed by the Invoice Factor and this will reduce youravailable funds. The query may be trivial and easily resolved, so it is veryimportant to deal with these matters as they arise, because failure to do so couldcause problems. You must always make sure that your Invoice Factors accountmanager keeps you fully advised of any disputes or queries that are brought totheir attention. 7. Questions?If you have any questions or comments about thisshort presentation tweet @crsitoffa or email:chris@marketcatalyst.co.ukI will be pleased to help you if possible.