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Frequently asked Questions
- What is Factoring?
- How does Factoring work?
- What Types of Factoring are there?
- What is Recourse Factoring?
- What is Non Recourse Factoring?
- What is Confidential Factoring?
- What is Export Factoring?
- What is Agency Factoring?
- What does Factoring cost?
- How Quickly can a Factoring Facility be set up?
- What are the Benefits of Factoring?
- What is the Difference between Factoring and Invoice Discounting?
- What is Bad Debt Protection?
- What Pitfalls are there with Factoring?
- What are the Benefits of using a Factoring Consultant?
- What types of Businesses can use Factoring?
- Will Factoring suit my Business?
- What types of businesses are not suitable for Factoring?
- What is Single Invoice Factoring?
- What is Selective Factoring?
- What is Sales Ledger Management?
- What is Trade Finance?
- What is Stock Finance?
- What is the Next Step?
- Why deal with Nationwide?
What is Factoring?
Factoring provides the finance your business needs to succeed. It produces an immediate cash injection from the funds you are already owed by your customers (i.e. Debtors). A factor will typically provide an initial advance up to 90% of the value of outstanding invoices within 24 hours plus an ongoing facility that increases in line with the volume of sales and values of invoices you issue.
How does Factoring work?
- You send out your invoices including an assignment notice and credit notes as normal providing a copy by post or electronically to the factoring company.
- The factor makes available an agreed percentage of the invoice value, up to 120 days old, usually by electronic transfer within 24 hours.
- The factoring company sends out monthly statements and ensures payment is received on time, having agreed a credit control strategy with you beforehand. This allows you to chase up some of your larger/more important customers yourself ensuring goodwill is maintained with them whilst still collecting the money in a timely manner.
- Your customers send their payments to the factor who in turn then credits you with the balance due i.e. less the initial payment and their charges.
- The sales ledger is updated on a monthly basis by the factoring company and, using the latest internet technology you can have immediate and real time access to all your account details.
- Regular management reports are provided by the factoring company giving details of the sales ledger and your account with them.
- Example of typical assignment notice. Initially a supply of stickers is provided if necessary but the notice is usually pre-printed on the invoice.
What Types of Factoring are there?
- Recourse Factoring
- Non Recourse Factoring
- Confidential Factoring
- Exporting Factoring
- Agency Factoring
What is Recourse Factoring?
- The factoring company advances funds against invoices and manages the sales ledger, issues statements, chases the debts and collects payments from your customers.
What is Non Recourse Factoring?
- Same as above but with the added advantage of bad debt protection. You can cover all of your customers or be selective, the choice is yours. Normally 100% cover is provided subject to a first loss of £1,000.
What is Confidential Factoring?
- Recognising that factoring still has negative connotations for some businesses most factors are now prepared to offer a confidential service.
- You will still receive up to 90% cash against invoices plus sales ledger administration and debt collection but the statements and any calls will be made in your name, not the factors. Your customers will not be aware of the factors involvement.
What is Export Factoring?
- There are a number of factoring companies who specialise in this area.
- They have in-house multi-lingual teams and a worldwide network of associated companies enabling them to offer a complete export service. This saves valuable management time in dealing with different time zones, cultures and legal systems enabling you to avoid unnecessary obstacles and keep overseas transactions moving quickly.
- All you have to do is send copies of your sales invoices and credit notes to the factor by post or electronically. An initial advance of 90% is made with the balance on receipt of payment from your customer. The factor collects payments, prepares and sends out statements and keeps detailed accounts of all transactions.
- Export factors usually insist on all debts being insured, which will add ½% to the service charge. Expect to pay 1% to 2% of turnover and interest charges of 2% to 3½½% over base.
What is Agency Factoring?
- Factoring companies understand that many clients are perfectly capable of running their own sales ledger. Allowing clients to be responsible for collecting their own debts reduces the costs of factoring significantly whilst retaining all the financial benefits of immediate cash against invoices.
What does Factoring cost?
- It depends on how much work is involved in handling your business. The cost will vary depending on your turnover, the number of customers you have, now many invoices you issue each month, what the level of returns/credit notes, etc is. The best guide I can give you is a service charge of 0.5 to 2% of turnover, including Vat and a borrowing cost of 2% to 4% over bank base rate. Bad debt protection will add 0.3%-0.5% to the service charge.
How Quickly can a Factoring 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 if speed is of the essence then the factors we introduce will pull out all the stops for you.
What are the Benefits of Factoring?
- An immediate cash flow injection coupled with a borrowing facility which rises automatically as your sales increase ensuring future growth is not restricted. No more cash flow headaches or dreaded calls to the bank. Also the facility is not normally re-payable on demand unlike a bank overdraft, thus removing another worry.
- With better cash flow comes increased bargaining power with suppliers and the potential for prompt payment discounts (more than covering the cost of the service). Conversely, there will be less need to concede discounts to your customers. A double bonus.
- Considerable savings in administration costs, stationery, bank and telephone charges, staff time, extra office equipment, etc., from outsourcing the sales ledger management. In addition the costs of employing a good credit control clerk which can be anything from £10k to £15k per annum is avoided.
- Release of that most valuable of resources time to concentrate on running and growing your business free from the shackles of keeping up with back office routines.
- Professional credit control speeds up the cash flow even further and helps identify early signs of payment problems keeping bad debts to a minimum. Most factors collect debts in 45/50 days.
- On line access to credit ratings allows you to trade confidently with new customers.
- 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.
- Most factors only require a charge over your debtors and a warranty from the directors whereas a bank will take a full debenture plus directors guarantees thus tying up all the company's and directors assets.
What is the difference between Factoring and Invoice Discounting?
- They both provide immediate and ongoing cash of around 90% of the value of your invoices but with factoring the lenders involvement is disclosed (except for Confidential Factoring) to your customers and the factor also undertakes credit management on your behalf. With invoice discounting the service is usually completely confidential and you are responsible for your own credit management. Bad debt protection can be added with both types of facilities.
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 Factoring?
- Service charge - this is levied on turnover including Vat. Notice how many of the factoring companies web sites and literature do not make this clear.
- Minimum charges - 1% of a £200/£300,000 turnover does not sound too bad but beware, most factoring companies have a minimum charge of at least £4,800.
Fortunately we know the factors who specialise in the SME market and their charges only start at £150 per month. - Advance Levels - do not believe what the glossy brochures tell you. Advance levels up to 90% are the exception, not the rule. Factoring companies 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 factors do not apply credit limits at all, potentially releasing 10-20% higher funding than other factors and we can point you in the right direction. - Minimal Annual Fee (MAF) - a relatively new innovation in the factoring 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 a factoring company that will accept three or six month's notice from day one.
- Concentrations Levels - most factoring 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 factors who will happily accept concentration levels of 100% and we can put you in touch with them. - High Export Content - as with concentration levels, many factoring 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-factoring fees. You need to check all of these out carefully before signing any factoring agreement.
What are the Benefits of using a Factoring Consultant?
- It is very difficult for a company acting on its own to identify which of the 50 plus Factoring 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 Factoring?
- No company is excluded, even those making trading losses or which have a negative net worth. This is because the factoring company's prime security is your customers through your invoices to them (as well as yourself). As a result factoring 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. VAT and NIC arrears are not usually a problem either.
Will Factoring suit my Business?
- Factoring 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 £100,000 but there are a few factors who will go down to £30,000 per annum. 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 factoring company's security is primarily your customers (through your invoices) as well as yourself. As a result factoring 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.
- Just as importantly factoring provides a complete sales ledger management service to those businesses that need it. Many businesses often find they do not have the resources to employ full time credit controllers or collection staff. Factoring overcomes this problem.
What types of businesses are not suitable for Factoring?
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 Single Invoice Factoring?
- 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 factor.
- This service is provided by very few factoring 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 Factoring?
- This option is ideal for companies dealing with large single orders or peak seasonal trading conditions. You simply nominate the individual debtor or group of debtors' you want to factor.
- This service is provided by very few factoring 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 Sales Ledger Management?
- This is the opposite of agency factoring. Many companies do not have a problem with cash flow but instead want to take advantage of the skilled personnel required for efficient sales ledger management and debt collection provided by factoring companies coupled with savings in administration costs and extra personnel.
- Credit protection can also be included.
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 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 a factoring facility incorporates funding right through to ultimate payment by the customer.
- Often associated with Trade Finance in the build up to Christmas etc.
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.
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.