Invoice Finance: Know the Facts
PUBLISHED: 12:02 22 March 2012 | UPDATED: 21:12 20 February 2013
Invoice discounting continues to support the SME market. Specialist company ABN AMRO Commercial Finance, formerly Venture Finance, has clients borrowing from £50,000 to £30m. Ian Burman, Regional Director for the South, talks us through the basics
In the current economic climate, small businesses face a number of challenges. One of the greatest of these is credit its hard to get an overdraft.
There has been a lot of press coverage on what the banks are doing to support the SME market. As we come out of recession, businesses are also looking for finance for the right reason, which is growth.
A major issue for businesses is late payment. Whilst invoices may have 30-day terms, they may in reality be paid after 60 days. Factoring or invoice discounting bridges that gap.
Invoice finance brings cash or working capital into the business, usually within 24 hours of the invoice being raised. The key thing is to fund the costs of the business day to day things like rent and wages.
Invoice finance releases an advance of up to 90 per cent of an invoice. That doesnt mean that we take the 10 per cent it means that the 10 per cent becomes available to the business owner when the customer pays their invoice.
Whats right for my business?
Factoring tends to be for younger businesses that havent got the infrastructure in place to take on credit control and sales ledger administration. An example would be a sole trader with no-one in place to chase debts. Factoring lets the clients download their invoices to us on an online system. We make up to 90 per cent of the invoice available within 24 hours and then, when the invoices are due for payment, a representative from ABN AMRO Commercial Finance calls and speak to the customer, ie. the debtor. We chase payment and when it comes in we update the sales ledger. The balance then becomes available to our client.
Invoice discounting can be a disclosed facility, where the debtor our clients debtor is aware that the business is using the facilities of a discounter, or it can be confidential. Usually, its confidential. These are businesses that are perhaps slightly more mature, that have been trading for a few years and at a strong level. They probably have a reasonable internal credit control function and they administer the invoicing, chasing, and the information that we as an invoice discounting company require to manage the facility.
With bank overdraft facilities, more often than not the bank is looking for some sort of security, and how much they will give you depends on the security you give. Its strict and it may be inadequate for the working capital requirements of the business. Invoice discounting effectively grows with the business. Its very flexible and in tune with the requirements of the business.
Factoring potentially carries a higher cost because there is more administration, and more people involved. Invoice discounting often has a flat fee. There are still costs, but because it tends to be confidential and we are not administering or chasing the sales ledger, theres not as much security for us. We tend to take an audit of the client, in terms of their procedures and collections. Those costs are built in.
Each option has a service fee and a discount fee. The service fee pays for the administration and is linked to workload and the turnover of the client. The discount fee is what you might call an interest charge. Typically youre looking at between 2.5% and 3% above BoE base rate. It all boils down, really, to how much the client borrows, and how quickly the invoice comes in.