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Frequently asked Questions
- What is Invoice Discounting?
- How does Invoice Discounting Work?
- What Types of Invoice Discounting are there?
- What is Disclosed Invoice Discounting (DID)?
- What is Confidential Invoice Discounting (CID)?
- What is Single Invoice Discounting?
- What is Selective Invoice Discounting?
- What does Factoring cost?
- What does Invoice Discounting cost?
- How Quickly can an Invoice Discount Facility be set up?
- What are the Benefits to my business of Invoice Discounting?
- What is Bad Debt Protection?
- What Pitfalls are there with Invoice Discounting?
- What are the Benefits of using an Invoice Discounting Consultant?
- What Types of Businesses can use Invoice Discounting?
- Will Invoice Discounting suit my business?
- What Types of Businesses are Not suitable for Invoice Discounting?
- What is Stock Finance?
- What is Trade Finance?
- What is Asset Based Funding?
- What is Structured Finance?
- What is the Small Firms Loan Guarantee Scheme?
- What is the Next step?
- Why deal with Nationwide?
What is Invoice Discounting?
Invoice discounting is a very effective way of improving a company's cash flow by converting its invoices into cash. With an initial advance level of 90% it provides an immediate cash injection into the business and an ongoing facility, which grows automatically as sales increase.
Invoice discounters will also provide finance against stock, plant and machinery and property - see Asset Based Lending.
Unlike factoring you maintain full control of your sales ledger, the issuing of statements and collection of cash. As a result the service charge is much lower.
How does Invoice Discounting Work?
- You raise an invoice as usual. You send a sales daybook listing to the invoice discounter either via the post or, more likely, over an internet link.
- The invoice discounter makes available the agreed percentage of the invoice value, up to 120 days old, by electronic transfer with in 24 hours.
- You send out statements and chase payments as usual.
- The invoice discounter opens a trust account in your company's name into which you pay all cheques received. Alternatively, you can include the bank details on your invoices and the client can pay directly into the account.
- You notify the lender of all deposits as received and he credits you with the balance i.e. less the initial payment and their charges.
- The invoice discounter provides monthly bank statements showing all transactions although these details can be accessed by you at any time online.
What Types of Invoice Discounting are there?
- Disclosed Invoice Discounting (DID)
- Confidential Invoice Discounting (CID)
- Single Invoice Discounting
- Selective Invoice Discounting
What is Disclosed Invoice Discounting (DID)?
- This is a half way house between factoring and confidential invoice discounting and is for companies whose balance sheets are not quite strong enough for CID. The company still manages its own sales ledger/credit control functions but as with factoring its invoices include an assignment notice requesting the customer to pay the lender direct.
- Fortunately for many companies this facility quickly develops into a confidential arrangement as the benefits of an improved cash flow take effect. Costs are slightly higher than for CID; a service charge of 0.35% to 1% of turnover and interest costs of 2% to 3% over base.
What is Confidential Invoice Discounting (CID)?
- Only available to well established businesses that are well run and have a history of profitable trading. They should be turning over £300,000 per annum, have a net worth of at least £30k and their sales ledger/credit control functions be fully computerised. Typical service charges are 0.1% - 1% of turnover and interest costs of 1% to 2% over base.
- The main difference between CID and factoring is the service is entirely confidential. Your customers are completely unaware of the arrangement.
What is Single Invoice Discounting?
- This option is ideal for companies dealing with large single orders or peak seasonal trading conditions.
- You simply nominate the invoice or invoices you want to discount or the individual debtor(s) you want to discount.
- This service is provided by very few invoice discounting companies. Advance levels vary from 80% to 95% of invoice value and the costs are higher than a standard factoring facility at 1% to 5% depending on the size of the invoice. The minimum invoice value is £1,000
What is Selective Invoice Discounting?
- This option is ideal for companies dealing with large single orders or peak seasonal trading conditions.
- You simply nominate the invoice or invoices you want to discount or the individual debtor(s) you want to discount.
- This service is provided by very few invoice discounting companies. Advance levels vary from 80% to 95% of invoice value and the costs are higher than a standard factoring facility at 1% to 5% depending on the size of the invoice. The minimum invoice value is £1,000
What does Invoice Discounting cost?
There are two charges. A service fee which can be anything from 0.15% to 1% of turnover, including Vat plus interest payable on the amount you borrow (also known as the Discount charge). This starts at 1% over bank base rate but is more typically 1½% to 3% over base rate.
How Quickly can an Invoice Discount Facility be set up?
This can take from a few days to a few weeks depending on the complexity of the deal. The average is 2/3 weeks but larger deals involving Management Buy Outs/Management Buy Ins and Asset Based Lending transactions will take longer. But rest assured the invoice discounters we use will pull out all the stops for you.
What are the Benefits to my business of Invoice Discounting?
- An immediate cash flow injection coupled with a borrowing facility which rises automatically as your sales increase ensuing future growth is not restricted. Increasingly today invoice discounting is seen as the better alternative to a bank overdraft. It is much more flexible, does not require constant upward negotiation and is not normally re-payable on demand; a major worry for lots of businesses.
- The service is completely confidential.
- Better cash flow gives increased bargaining power with suppliers (prompt payment discounts) and conversely, less need to concede discounts to your customers. A double bonus.
- Reduced cash flow worries releases more time to concentrate on running and growing your business.
- Online access to credit ratings allows you to trade confidently with new customers.
- Bad debt protection gives you complete peace of mind knowing you will be paid within 120 days come what may.
What is Bad Debt Protection?
Bad debt protection means you get paid within 120 days of the invoice date if your customer becomes insolvent. You also avoid the policy administration/claims procedures associated with traditional credit insurance.
What Pitfalls are there with Invoice Discounting?
Service charge - this is levied on turnover including Vat. Notice how many of the invoice discounters web sites and literature do not make this clear.
Minimum charges - 0.3% of a £200/£300,000 turnover business does not sound too bad but beware, most invoice discounters have a minimum charge of at least £8,000.Fortunately we know the invoice discounters who specialise in the SME market and they have much lower minimum fees.
Advance levels - do not believe what the glossy brochures tell you. Advance levels up to 90% are the exception, not the rule. Invoice discounters conduct regular audits during which they will look at the levels of contras', credit notes/returns, invoices over 90 days old and customers exceeding their credit limits. Once these are taken into account the true level of advance is more typically 70/75%. You need to be realistic about this.
However, some invoice discounters do not apply credit limits at all, potentially releasing 10-20% higher funding than other invoice discounters and we can point you in the right direction.
Minimal Annual Fee (MAF) - a relatively new innovation in the invoice discounting industry, the use of MAFs has increased rapidly in recent years. Typically a minimum of one year is stipulated but we have seen agreement's spanning two and three years. An initial one-year period is not unacceptable with three months notice thereafter, but make sure the break fee is pro-rata after the initial period. Better still let us help you find an invoice discounter that will accept three or six month's notice from day one.
Excessive Break Fees - not content with tying clients in for extensive periods invoice discounters will also often establish a lending limit up to twice the level of that needed, i.e., £10m when £5m is more that enough. Needless to say the break fee is based on the higher of the two figures.
Concentrations Levels - most invoice discounting companies like to see a wide spread of customers with no one representing more than 30% of turnover. If this happens they will disallow the excess with potentially disastrous consequences for your cash flow.
This is not much help to new start-ups with few customers or growing young companies looking to take on all the business they can.
Fortunately there are a number of invoice discounters that will happily accept concentration levels of 100% and we can put you in touch.
High Export Content - as with concentration levels, many invoice discounting companies are not comfortable with an export level of more than 20-25%. Others will not fund exports at all. Thankfully there are a number of market specialists who are geared up to accept export levels of 70-80% and up to 100% where appropriate. Again, we will introduce them to you.
Miscellaneous Charges - these include quarterly audit charges, electronic transfer fees, bank charges and re-invoicing fees. You need to check all of these out carefully before signing any invoice discounting agreement.
What are the Benefits of using an Invoice Discounting Consultant?
It is very difficult for a company acting on its own to identify which of the 50 plus Invoice Discounting companies operating in the UK will provide them with the most appropriate facility for their needs and at the lowest cost. Our Consultants have many years experience of the industry coupled with significant leverage with the lenders and we use that expertise on all our clients behalf to secure the most suitable and cost effective facilities for them.
What Types of Businesses can use Invoice Discounting?
No company is excluded, even those making trading losses or which have a negative net worth. This is because the invoice discounting company's prime security is your customers through your invoices to them (as well as yourself). As a result invoice discounting is available to Sole Traders, Partnerships, Limited Companies, PLC's, New Start-ups plus business in an IVA or CVA and companies arranging a phoenix PAYE and VAT arrears are not usually a problem either.
Will Invoice Discounting suit my business?
Invoice Discounting is suitable for most businesses in the manufacturing, business services and distributive trade sectors in the UK selling goods and services to other businesses on normal credit terms.
Ideally you should have a turnover of £250,000. There is no upper limit.
No company is excluded, even those making trading loses or which have a negative net worth. This is because the invoice discounting company's security is primarily your customers (through your invoices) as well as yourself. As a result invoice discounting facilities are available to Sole traders, partnerships, limited companies, Plc's, new start-ups and even businesses in an IVA or CVA plus phoenix situations. Paye and Vat arrears are also not usually a problem.
What Types of Businesses are Not suitable for Invoice Discounting?
The problem areas are: -
- Long term contracts and retentions
- Stage payments
- Potential installation disputes
- Maintenance contracts
Maintenance contracts can usually be overcome by putting them into a separate company and there are specialist trade financiers who might be able to help with the other problem areas. So, do not be put off. If you do not ask the answer is always no.
What is Stock Finance?
Stock Finance enables companies to finance stock-building against confirmed customer orders and is ideally suited for businesses with seasonal fluctuations.
A Stock Finance facility enables prompt payment to be made to suppliers during the build up to the sales season, and supported by an invoice discounting facility incorporates funding right through to ultimate payment by the customer.
What is Trade Finance?
You have a confirmed order from a credit worthy customer but lack the cash to fulfil it.
Trade financiers specialise in helping companies achieve the growth that is so often in their potential but beyond the scope of traditional financiers i.e. banks.
By paying your supplier direct or opening a letter of credit the trade financier can fund 80% to 100% of the cost of goods plus duty and Vat.
Trade finance facilities are complimentary to your existing funding arrangements and enable you to take on additional business, which would otherwise be lost.
What is Asset Based Funding?
This is the hottest sector of the invoice discounting market. Lenders have realised that they can add value to a customers requirements by looking beyond just the debtor book. By including a company's stock, plant and machinery and property they can provide a much bigger revolving line of credit. By flexing the facility in this way advances up to 150% of debtors can be achieved.
This type of finance is particularly suited to: -
- Management Buy Outs /Buy Ins
- Acquisitions
- Mergers
- Re-finance of existing bank overdraft
- Turnaround Situations
Where more funding can be released than through a conventional overdraft. In so doing there is less need to call on venture (or should that be vulture) capitalists for help. This ensures maximum retention of equity in the hands of management.
Typical advance levels are:-
- Debtors 90%
- Raw Materials 30%
- Finished Goods 60%
- Plant & Machinery 80%
- Property 60%
The starting level for Asset Based Lending is £1m with transactions over £100m not uncommon.
For larger deals (£5m plus) senior debt and mezzanine debt can also be provided.
Amongst the limited number of invoice discounters who can provide total asset based finance solutions there is a keen appetite for this type of business and the costs are equally competitive.
What is Structured Finance?
This is the hottest sector of the invoice discounting market. Lenders have realised that they can add value to a customers requirements by looking beyond just the debtor book. By including a company's stock, plant and machinery and property they can provide a much bigger revolving line of credit. By flexing the facility in this way advances up to 150% of debtors can be achieved.
This type of finance is particularly suited to: -
- Management Buy Outs /Buy Ins
- Acquisitions
- Mergers
- Re-finance of existing bank overdraft
- Turnaround Situations
where more funding can be released than through a conventional overdraft. In so doing there is less need to call on venture (or should that be vulture) capitalists for help. This ensures maximum retention of equity in the hands of management.
Typical advance levels are:-
- Debtors 90%
- Raw Materials 30%
- Finished Goods 60%
- Plant & Machinery 80%
- Property 60%
The starting level for Structured Finance is £1m with transactions over £100m not uncommon.
For larger deals (£5m plus) senior debt and mezzanine debt can also be provided.
Amongst the limited number of Structured Finance lenders who can provide these types of solutions there is a keen appetite for this type of business and the costs are equally competitive.
What is the Small Firms Loan Guarantee Scheme?
The Government introduced the Small Firms Loan Guarantee Scheme to help small businesses fund sustainable growth when other borrowing options are not available either through lack of a track record or security.
In the context of the Factoring and Invoice Discounting industry there are occasions when a factoring or invoice discounting facility is not enough to provide all the funds a business needs to achieve its plans. Combining the invoice discounting facility with a term loan under the Small Firms Loan Guarantee Scheme can provide the solution.
Who can Apply?
Available to companies with up to 200 employees including: -
- Manufacturers having a turnover up to £3m
- Distributors and Service Providers with a turnover of no more than £1.5m
Loans cannot be provided however, to buy out members of a partnership, finance interest payments or buy company shares.
How much can I borrow?
Up to £250,000 is available to assist with the following purposes: -
- Expansion and Growth
- Investment in plant and machinery
- Acquiring new business equipment
- Project development costs
- Improving operations efficiency
If you have been trading for less than two years you can borrow from £5,000 to £100,000. A company that has been trading for more that two years can borrow up to £250,000.
Terms and Conditions
- Loans are re-payable over 2-5 years
- Repayments are made either monthly or quarterly
- For loans over £15,000 it may be possible to defer repayments for up to two years
- Security will be required in the form of business assets such as machinery or property
Borrowing costs comprise:-
a) interest payments of 2% - 6% over bank base rate payable to the lender
b) facility fee of 1½% of the loan amount payable to the DTI for the provision of its guarantee. This fee is payable annually in advance.
What is the Next step?
Nationwide Asset Finance Limited is here to help you achieve your aims.
Whether you are a new start-up or £100m turnover Plc. Close to insolvency or about to make an acquisition. Looking for corporate finance or turnround finance. We can structure a facility incorporating factoring/invoice discounting, a refinance of your existing plant, machinery and vehicles or re-arrange any property loans. If that is not enough then we can also add secured loans, mezzanine finance and venture capital, although we would only use the "vultures" as a last resort.
Whatever your needs are we can usually provide a solution.
Why deal with Nationwide
- ....because we are on your side. Call us now on 0800 505 3399 or 01539 735200 to discuss your options.
Thoughts for the day
"there is always someone in the world who
can offer an inferior product or service at a
cheaper price. Anyone who buys from that
man becomes his lawful prey"
John Ruskin
"The bitterness of poor service lasts
long after the initial sweetness
of a cheap price"
John Ruskin
"Why is it there is never enough
time to do a job properly but
there is always enough time
to do it again?"
David Eckersley