Spot factoring and invoice discounting

Perry Burns of Working Capital Partners talk us through the market for spot factoring

A typical factoring or ID facility will be assessed on the creditworthiness of the supplier who will be expected to offer most, if not all, of his ledger to the Factor and to commit a minimum amount of annual revenue to them.  There may also be a fairly complex charging structure which can make the facility seem hard to understand and expensive.  To mitigate this, some factors will offer a debt collection service. This can be something of a mixed blessing because, by definition, they are less worried about the commercial relationship between the supplier and the customer; and may be rather more aggressive in collection than the supplier himself would be.

For these and other reasons, suppliers often regard factoring as a necessary evil and enjoy a love hate relationship with their Factor borne out of the frustration that the delay in collecting cash can cause.

Although it is very common in the USA and Canada, until very recently, Spot Factoring or
Single Invoice Factoring has not been very common in the UK.  This is for two main reasons.  Firstly the sums involved are typically too small to be economic for a large Factor to support.  Secondly, to make it work the Factor has to have a close working relationship with the supplier and really understand his industry and business processes.  For most financiers, the investment in creating the relationship is simply too high in terms of the likely reward.

Nevertheless the demand is there.  Small and newly established businesses have just as great a need for cash as larger enterprises.  Especially with bank lending still being very tight, they are finding it very hard to grow out of the recession as quickly as many of them would wish.

The funding options for smaller businesses tend to be very limited.  As they are new, they have very little track record, and even where they do they often want to do larger deals than they can finance.  Banks are typically unable to help and for the reasons stated above, factoring is usually not an option.  This means that they lose the opportunity to
grow and can become bitter and frustrated.

With the arrival of spot invoice discounting however, all this has changed.  With our Spot Factoring service, the facility is put in place and used on an as needed basis.  There is no minimum commitment and each transaction is judged purely on its own merits.  Thus a new start selling say, services to the NHS or a Local Authority would be eminently financeable, even if the transaction was only a few thousand pounds.  As long as we have
evidence of provable debt, the transaction can be financed, usually to 85% of
its face value.  And of course because this is Selective Single Invoice Discounting, once the customer has paid, the obligation to us is normalised and there is no unwinding fee or
future commitment.

The process is simple.  Once we are introduced to a new supplier we undertake a basic review to ensure that there are no obvious red flags.  Single invoice discounting is
offered as a recourse transaction, so we have to be sure that if the customer
fails, the supplier will be in a position to repay the advance.  Especially for younger businesses therefore, the directors will be required to guarantee the outstanding amount and a debenture on the company’s assets will usually be required.  We normally require that the business has more than one customer and we will only take up to 60% of their receivables.

Assuming that the client passes the preliminary checks, we will meet with them to put in
place a facility deed which sets out the terms and conditions of the arrangement and includes all the necessary guarantees.  At this stage a fee of £500 + VAT is payable
which covers set up of the arrangement and a free customer credit checking

As soon as an invoice for factoring is identified, the supplier forwards the details to us by
phone or email together with proof of delivery and we aim to provide an indication within 24 hours.  For a new invoice, the supplier adds an endorsement to the invoice showing that payment is due to us or if the invoice has already been issued, writes to the customer
informing them that the debt has been sold and that settlement is now due to
us.  As soon as we have verified that the debt is genuine and that the customer intends to pay, we make a bank transfer the same day.

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Selective single invoice discounting:

  • is flexible
  • has no hidden charges
  • helps suppliers to pay key creditors on time
  • keeps customer relationships with the supplier
  • requires no minimum charges or ongoing commitment
  • gives the ability to offer extended credit terms to larger customers
  • provides immediate access to cash – the lifeblood of any growing business
  • offers the opportunity to take advantage of beneficial deals on materials or plant
  • is simply priced with straightforward  fees ranging from just 4%- 10% depending on the age of the debt

The service is NOT industry-sensitive. Funding can be provided for virtually any business selling a B2B product or service on
standard credit terms. The scheme has been devised especially with smaller business in mind to fund their growth. As their sales escalate so does the available funding.

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