FAQs
Factoring and Invoice Discounting FAQs
Will Factoring or Invoice Discounting upset my customers?
A factoring or invoice discounting company needs to keep you and your customers happy. A factoring or invoice discounting company will work with you, not against you.
How much will factoring or invoice discounting cost?
Give us a call and we will get you a quote from 3 different factoring or invoice discounting companies. We know the best factoring or invoice discounting providers for your industry.
Will I have to change my bank accounts with a factoring or invoice discounting facility?
No, you do not have to change your bank accounts with a factoring or invoice discounting facility.
How long will it take a factoring and invoice discounting facility to be set up?
A factoring or invoice discounting facility can be set up within 2 working days.
What will my customers think if I use factoring or invoice discounting?
If you use a confidential invoice discounting facility your customers will never know. Factoring itself is becoming more and more common and is preferred to an overdraft by many.
How long will a Trade Finance facility take to set up?
A trade finance facility can be set up in a matter of days by a factoring or invoice discounting provider
How much will a Trade Finance Facility cost?
Each trade finance facility must be looked at individually and Positive Invoice Finance will go to the market and find the right Trade Finance facility for you – at the right price.
Can I use Trade Finance to fund the purchase of imported goods?
A Trade Finance facility is ideal for using on imported goods.
How much does factoring cost?
Factoring charges are normally split into two types: service charge and interest charge. There costs will vary depending on the size the facility and the risk profile of your company and industry sector.
When do I receive the cash advances from the factor?
Once the goods have been delivered and/or a service provided and you raise an invoice to your customer you can send this to your provider who will then provide the funds.
What is the difference between factoring and invoice discounting?
Factoring and invoice discounting are both forms of invoice finance i.e. money is borrowed with unpaid invoices used as the security on the loan. The main difference is that in factoring the service provider collects the debts and in invoice discounting the client collects the debts.
What is the difference between recourse and non-recourse financing?
Recourse factoring is without bad debt protection and non recourse is with bad debt protection
How much does a factoring company advance?
The amount of the advance will be decided after the factoring company has completed their audit. It can be up to 100%.
Are my debtors aware that my sales invoices are being funded?
Your debtors would be aware that you are using an invoice service if you chose a factoring or disclosed invoice discounting deal. If you chose a confidential invoice discounting deal they will not be aware you are using an invoice finance service.
Will I have a dedicated point of contact for my facility?
You will have a dedicated contact for your facility – this will be your client manager.
Do I have to be a limited company to qualify for factoring?
No, you do not need to be a limited company.
Can high customer involvements be accommodated?
Yes – some factoring companies will do single debtor ledgers.
How long do I have to sign up for?
Most are usually 12 months contract terms, but it could be anything from 1 month to 2 years.
What security do I need to offer?
Generally the debtor book is enough security. In some cases PGs will be requested.
Can I protect my business against bad debts?
Yes. You can use Non recourse factoring which is basically credit insured.
Does factoring meet companies' cash flow needs, and nothing else?
Most people believe that companies only use factoring when they require funds. This is not true, as factoring offers companies a complete range of services. It is a high-performance technique for customer account management. Outstanding payments are at the root of one business failure in four. Factoring helps companies protect themselves against customer risk. The factor works to prevent this and encourage them to "achieve a good turnover". But in the case of a customer's insolvency, the factor undertakes to recover the money owed. Customers are followed up systematically and as a result of their efficiency, factors succeed in reducing by half the number of late payments recorded by companies. Financing debt is not the only service factors offer companies. Factoring is a high-performance mechanism for customer account management.
When is it necessary to use factoring?
Companies may require factoring throughout their lifetime. In the start-up phase, the financing of debt by a factor can alleviate a shortage of funds or bank loans. In a more mature phase, when a company is engaged in increasing its turnover, there are many reasons to use the services of a factor: to provide protection against its customers going bankrupt, to escape from administrative drudgery or even to finance its growth. Lastly, when the business starts exporting, its factor provides the essential structure to support its international expansion. Furthermore, once companies are on a more comfortable financial footing, there is evidence that they continue to be loyal to their factor on account of the quality of service offered. Therefore factoring is a long-term management choice.
What is the true cost of factoring?
Paying for factoring breaks down into two charge elements. The first is the factoring charge, which pays for book-keeping, customer follow-up, debt collection and guarantee. This charge is in the region of 0.5 to 3% of turnover. It is determined according to the characteristics of each company: turnover, invoicing procedure, clientele, etc… The second element of the charge, the financing fee, is comparable with current short-term rates. Factoring enables fixed costs to be transformed into variable costs. With the cost of the external service (1% on average) clearly identified, the company and its board of directors have the opportunity to compare it objectively with internal costs. The amount of financial saving afforded by factoring depends on the specific characteristics of each business. Companies that use factoring claim a reduction of more than 10 days in the length of delay in payment, which further reduces their financial costs.
At whom is factoring directed?
The turnover of factored companies ranges between £50,000 and millions of pounds. But, whatever their field of business and their size, factoring is directed at all companies whose invoicing procedures generate certain and eligible debts. Factoring is for small businesses in the start-up phase as well as for very large companies. Increasingly, the latter are choosing to subcontract their customer account management. Finally, factoring is useful to companies whether their market is national or international. In the same way as with their English customers, exporting companies can have their debts financed and enjoy all the other factoring benefits (guarantee, follow-up, debt recovery). Such services are all the more appreciated since they enable the company to overcome more easily all the geographical, linguistic and legal hurdles.
Does the use of factoring give the impression of a company in difficulty?
Quite the contrary. Companies that use factoring present a responsible image, demonstrating that they prefer sure and effective management. They guarantee their accounts receivable and ensure adequate financing for their growth. Nowadays, various elements play a part in creating a different image of factoring and therefore in changing the perception customers may have of their "factored" supplier. On the one hand, companies that are considered front-ranking by virtue of their size or renown, use factoring; on the other, through what they say, world political and financial figures tend to promote factoring. This financial mechanism is an effective response to the increasing number of business failures, to lengthening delays in payment and to the difficulty businesses have in obtaining financing. Factoring has proved its economic justification.
Which risk does the factor assume?
Debts approved by the factor may be guaranteed up to 100% against the risk of insolvency. In the case of a claim, the company will immediately be indemnified within the limits of previously agreed arrangements. But, when the factor decides to limit the desired guarantee liability in relation to certain customers, he does so with full knowledge of the facts. Factoring companies actually have very complete databases, and so they are fully aware of customers' financial situation and payment behaviour. Factors' experience regarding payment patterns is irreplaceable. So when they choose not to deal with a particular customer, they send out a real alarm signal. Companies that follow their factor's advice claim that in almost all cases the choice was justified.
How can the company derive maximum benefit from its relationship with its factor?
Setting up factoring requires the company to have a good understanding of how it works. The onus is therefore on the factor to conduct thorough training for all those involved in customer account management. Factoring then enables real productivity gains to be made. Through its factor, the company actually acquires a customer management service worthy of a large company. The means of exchanging computerised data enable it to obtain information regarding an invoice or a customer account and to keep a regular check on overruns, follow-ups or current disputes. Thanks to its factor, a company always has access to an overall analytical view of its accounts receivable. Finally, its customer account management is considerably reduced: the factor manages most of the regular business, and the company has to deal only with the exceptional cases.
How does a company chose between factoring and credit insurance?
It is a matter of a clear definition of company needs. If the company were seeking exclusively to prevent risk and have cover against outstanding payments, then credit insurance would be the best option. If the company expects a broader range of services, then, amongst other things, a factor can provide indemnity cover up to 100% of losses. Furthermore the company will not have to fund the indemnity gap provided for in credit insurance. The factor is an active partner because he operates at all levels of customer account management.
How do factoring companies fit into the company-customer relationship?
The company retains the exclusive nature of its relationship with its customers. Negotiating the terms and conditions of sales, namely price, delivery time, discount and so on, are always a matter for the company. On the other hand, the company can strengthen its links with customers and concentrate on market exploration because it does not have to handle debt collection. Too often burdened by this thankless job, the sales function can thus return to its main task. In the case of a dispute, the factor does not embark on any procedure without first informing his client. In all instances, the system is flexible and involves concerted action. The factor provides the company with full information regarding its customer situation, thus enabling the company to direct its sales policy accordingly.
What effects does signing a contract with a factor have on the relationship between a company and its bank?
A company uses factor financing to increase and supplement traditional bank financing. Part of the financing offered by the factor can be granted in the form of promissory notes. The client thus has the opportunity of maintaining an overdraft facility with its bank which is willing, on attractive terms and conditions, to recognise the promissory note as a high quality debtor. In many cases, the banker plays an advisory role by actually directing his client to a factor to enable him to benefit from all the guarantee and management services offered. Thus the banking relationship is maintained, perhaps even strengthened. Functions turn out to be complementary whilst at the same time retaining their specific characteristics.
If you have any more questions regarding factoring or invoice discounting please feel free to give us a call now!
Positive Invoice Finance - The Factoring and Invoice Discounting Broker
