Business Finance Services - A Guide to Factoring and Invoice Discounting

Trades and Business Development Business Finance Services: A Guide to Factoring and Invoice Discounting The overriding concern for a finance company is how "recoverable" the debts are in the event that the company ceases to trade or becomes insolvent. In most cases, the production of a formal offer letter comes following an audit at your premises to perform "due diligence". The factor/discounter will need to audit how well the business is run, what systems are in place and verify that the financial statements and business plan make sense.

Augustus Hall Limited (RC. 912580) www.augustushall.com

http://www.augustushall.com/

Trades and Business Development

www.augustushall.com

Augustus Hall Limited (RC. 912580) | www.augustushall.com

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Augustus Hall Limited (RC. 912580) is a privately owned Credit Control Consultancy Firm based in Victoria Island, Lagos, Nigeria.

We remain focused on applying our in-depth experience and up-to-date knowledge to helping our clients towards an even brighter

business future. We specialise in offering: Credit Industry Training | Commercial Debt Collections | Consumer Debt Collections |

Credit Control Consultancy | Credit Risk Identification and Mitigation | Debt Mediation | Commercial Mediation and Negotiation |

Contract & Commercial Management | Research | Trades and Business Development | Debt Restructuring, Workouts and Collections

| Terms of Trade Documentation | Business Rescue and Support | Debt Purchase and Sale Brokerage | Creditor Meetings Service |

Factoring & Invoice Discounting | Refinancing & Asset Finance | Trade Finance | Credit Insurance | Accounts Payable Management

Solutions | Accounts Receivables Management Solution | Outsourcing | Document Management Solution | Invoicing and Billing |

Consulting and Advisory | Audits and Performance Evaluations | Software.

www.augustushall.com | [email protected] | Tel: +234 (0)1-217-0730, +234 (0)802-977-

2849, +234 (0)702-534-7079, +44 (203)-5140-885 | Fax: +44 (203)-5140-872 | P.O. Box 4528

Surulere, Lagos State, Nigeria.





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Business Finance Services: A Guide to Factoring and Invoice

Discounting

Time is not your friend if you have slow cash flow...

A Guide to Factoring and Invoice Discounting

Note - if any of the terms below are new to you, do take advantage of our Glossary of Business

Finance terms in the last page of this write-up.

Introduction

The UK market for factoring and invoice discounting continues to grow year on year.

Unlike overdraft facilities which are pre-agreed and relatively rigid, invoice finance provides

flexibility as sales grow without the need to re-negotiate the entire facility.

Most businesses trading on credit terms can now be supported, whatever they are involved in

providing, the trade debts are on a business to business basis and are "recoverable".

The overriding concern for a finance company is how "recoverable" the debts are in the event that

the company ceases to trade or becomes insolvent.

In most cases, the production of a formal offer letter comes following an audit at your premises to

perform "due diligence". The factor/discounter will need to audit how well the business is run,

what systems are in place and verify that the financial statements and business plan make sense.

The commercial reality today is such that each company will take a differing view of risk and

"recoverability" so that funding trade invoices is more a question of finding the right provider with

the right view of your business.




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If you are not sure that your current debtor book is fundable due to accounts being over 90 days old

then talk to us about our UK debt recovery and international debt collection services. We have the

experience and expertise to turn your debtor book into a funding proposition.




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What is Invoice Discounting?

If your cash flow is slow, do something about it...

What is invoice discounting and how does it work? Invoice Discounting provides a cash flow

solution for business.

How Does Invoice Discounting Work?

The invoice discounting company (discounter or invoice discounter) will buy the trade debts (also

known as accounts receivables, or your sales ledger) of the business at an agreed funding rate.

Discounters typically advance 80% to 85% of the face value of valid invoices, for example...

A company raises new sales invoices of £100,000. Based on the 85% advance it would generate a

cash injection of £85,000. This releases working capital that would otherwise be "locked up" and

provides immediate cash flow enabling you to pay creditors and use that cash for expansion and

growth.

The discounter will then continue to provide you with up to 85% of the value of new sales invoices,

normally within 24 hours of you raising them. The other 15% of the value of your sales invoices is

passed onto you (minus fees) when the customer pays.

There are some circumstances where overpayments can be arranged, however this type of advance

will be determined on the basis of how the facility has been maintained and if a successful and

trustworthy transactional history has been built up.

Once the facility is in place, there is no limit to the amount you can borrow as the level of finance is

directly linked to the level of sales. So as your business grows so does the amount of funding

available to you. This is in sharp contrast to bank overdrafts, which require regular re-negotiation

and arrangement fees.




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What Are The Criteria For Invoice Discounting?

Invoice discounting facilities are normally made available to established businesses with turnovers

in excess of £250,000.00 which have good systems in place to ensure reliable collections from their

customers.

How Does Invoice Discounting Differ From Factoring?

The fundamental difference between invoice discounting and factoring is that you are responsible

for the collection of cash from your debtors. The payments that you receive are paid into a nominee

bank account which is administered by the invoice discounter.

Where a Confidential Invoice Discounting facility (CID) is in place your customers are unaware that

a discounter is funding your business.

For any business the potential for bad debt will always be an issue. If you are concerned about bad

debts, many discounting companies can provide a facility that will include bad debt insurance

protection for additional security.




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What is Factoring?

What is factoring (or invoice factoring) and how does it work? Factoring provides a working capital

solution and operates in much the same way as invoice discounting except this type of funding is a

"disclosed" facility which means that your customers will be fully aware of the factor's existence.

How Does Factoring Work?

Factors typically advance 80% to 85% of the face value of valid invoices, for example...

A company raises new sales invoices of £100,000 which contain an instruction to pay the factor.

Based on the 85% advance the company would receive a cash injection of £85,000. This releases

working capital "locked up" that will improve the cash flow enabling you to pay creditors and use

that cash for expansion and growth.

The factor will send out debtor statements, chasing letters and will also contact debtors by

telephone to ensure prompt payment.

The factor will then continue to provide you with up to 85% of the value of new sales invoices,

normally within 24 hours of you raising them. The other 15% of the value of your sales invoices is

passed (minus fees) onto you when the customer pays.

For any business, the potential for bad debt will always be an issue. If you are concerned about bad

debts, many factoring companies can provide a facility that will include bad debt insurance

protection (commercial-trade-credit-insurance) for additional security.

There are some circumstances where overpayments can be arranged, however this type of advance

will be determined on the basis of how the facility has been maintained and if a successful and

trustworthy transactional history has been built up.




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Once the factoring facility is in place, there is no limit to the amount you can borrow as the level of

finance is directly linked to the level of sales. So as your business grows so does the amount of

funding available to you. This is in sharp contrast to bank overdrafts, which require regular re-

negotiation and arrangement fees.

What are the criteria for factoring?

Factors' requirements vary from company to company. Some will consider start-ups but typically

the company must be operating on a business to business basis and have a turnover of £50,000.00

or higher.

Small Business Factoring

Small business factoring is often the ideal solution for small businesses that don't have a dedicated

credit controller and need access to flexible funding options that go beyond the level of finance that

would be available from a traditional overdraft.

Credit Control/Credit Management firms can introduce you to a factor that specializes in helping

smaller businesses or even start-up businesses. There are no minimum size criteria and annual

services charges can start from as little as £2,000. We can also introduce you to lenders that can

provide you with a loan via the Small Firms Loan Guarantee Scheme.




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Is Factoring Or Invoice Discounting Suitable For My Business?

The most suitable candidates for factoring and invoice discounting are growing businesses because

the level of funding grows proportionately as turnover increases. However, if you are using

traditional loan and overdraft facilities which the bank will not increase, then this type of facility

will provide a solution for cash flow.

Although this is a relatively low cost way of increasing your cash flow it would be wise to examine

the costs of alternative options before entering into an agreement. Also, debt finance providers tend

to prefer firms which receive invoices where it is clear that the goods or services have been

delivered and where few payment disputes or credit notes have occurred.

A potentially costly mistake which some companies make when arranging a factoring service is

picking the first provider they come across. There are so many providers that simply looking on the

internet will probably not get you the best deal.

Online Quotations for Factoring: A Word of Caution

There are many websites that provide online quotations for factoring and invoice discounting

facilities. Although these are a useful way of obtaining quick price comparisons, they should be

treated with care.

Through our experience of working with customers who have initially used these sites they

produce figures which ultimately have no relevance to the final funding proposal or standard of

service because of:

1. Amended quotations - Quotations are produced automatically using formulae that are built into

the website. Providers use a variety of criteria to calculate the initial payment percentage and often

one of the criteria could significantly affect the amount advanced, for example a large number of

credit notes raised.

2. The focus on price - One of the benefits of a site that allows you to compare online quotations is

that you can compare the price charged by different providers. However, there is a drawback with

this approach in that it doesn't focus on the service you will receive or the nuances of how the

provider operates.




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Whilst price comparison is important, in practice there are subtle differences between the way that

different factoring and invoice discounting companies operate and these differences need to be

understood.

Factoring with one provider may suit one business but not another due to the nature of the product

or service provided.




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The Advantages and Disadvantages of Factoring and Invoice Discounting

Advantages of Factoring and Invoice Discounting

Making use of an invoice factoring or discounting service can improve your bottom line and offer

your company a whole range of benefits, such as:

1. Improved cash flow by releasing up to 85% of funds against the value of outstanding invoices

2. It gives you access to an ongoing supply of cash that grows as your sales grow

3. In the case of factoring, you work with a dedicated team of professionals who will prepare and

send out statements, telephone all of your customers, collect payments for you and maintain

professional and detailed accounts of your transactions

4. Management time is freed to drive the business forward as you are no-longer spending time on

unpaid accounts and are no-longer held back by insufficient cash flow

5. By making use of a factoring facility you can benefit from improved profitability as you can pay

suppliers earlier, buy in larger quantities and take advantage of any volume discounts available

6. Knowing exactly when you are going to be paid assists with financial planning

7. You may find that some customers respect factors and pay their debts more promptly

8. It is possible to protect your company from bad debts if you decide to choose non-recourse

factoring

9. You receive cash as soon as orders are invoiced which gives you the option of using it for capital

investment and to fund future orders

10. The facility provides flexibility for the business and access to a range of additional products

such as cash flow loans, trade or transactional finance




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Disadvantages of Factoring and Invoice Discounting

1. The factor will want to set credit limits for customers which may affect the way you trade

2. Exiting the agreement can be difficult

3. Disputed invoices must be dealt with quickly to avoid them being re-coursed

4. In the case of factoring, you are reliant on the factor to collect the debt in a timely and efficient

manner




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Recourse and Non-Recourse Factoring Facilities

When you make use of an invoice factoring company it is very important to be aware of who is

responsible for debts which occur when customers fail to pay.

If you have a recourse factoring facility then the factor will not take the risk of the debt on, they will

just collect the money from you if an invoice goes unpaid.

Recourse Factoring Facilities Explained

This is a lower cost form of factoring because you continue to take the risk of bad debt rather than

the factoring company. This type of factoring is also easier to attain, the invoice factor will tend to

have less stringent rules about your business systems and the payment history of your customers.

Once the invoice is returned to you, you are responsible for collection. If you are unable to do this

then you can contact us and make use of our recourse collection service (see UK commercial debt

recovery and international debt collection).

Non-Recourse Factoring Facilities Explained

With non-recourse factoring the factor assumes responsibility for all bad debts. This means that if a

customer does not pay an invoice, either through insolvency or protracted default, you do not have

to pay back the amount advanced to you by the factor.

The factor legally takes ownership of the debt and as a result this type of facility attracts higher fees

as the factor is increasing their level of risk.

Non-recourse factoring facilities are difficult to obtain if you have weak financial systems or

numerous customers with bad payment histories as strict credit limits will be set for your

customers.

It is important to choose the correct type of factoring for the current state of your business, but

equally important is choosing the right invoice factoring company to deal with. There are some




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factors in the market who offer lower levels of customer service, even if they charge low fees this

lack of service could end up costing you more in the long run.




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Bad Debt / Credit Insurance Protection

Bad debt protection can be provided independently (on a stand-alone basis) or in addition to either

factoring, invoice discounting or export finance.

In some cases funding is linked to credit limits but we can introduce you to providers where that is

not the case.

If you don't want finance or collections support, we can introduce you to a specialist organization

that can provide you with credit insurance against bad debts. Commercial trade credit insurance

can be provided against all of your sales, on a whole turnover basis, or against specific customers. It

can also be provided on a catastrophe basis so that you are only covered against significant losses.

If you would prefer 100% cover we are equally able to assist you. See credit insurance for details.




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Bad Debt Insurance Protection: Commercial Trade Credit Insurance

Credit Management Services

Cash flow is more important than profit and the lack of cash at crucial trading periods is often the

reason businesses fail...

Why Credit Insure?

The extension of trade credit is a requirement of daily business activity and the future cash flow of

any business is often tied up in the biggest current asset - the debtor book or sales ledger.

Commercial trade credit insurance is a credit management service designed to protect not only this

valuable asset but also to protect the company balance sheet and ultimately the net worth of the

business.

In any trading climate, protecting your business from the danger of bad debt or insolvency whether

on a 'Whole Turnover', 'Key Account' or 'Key Contract' basis could make the difference to your

businesses survival.

Trade Credit Insurance

The commercial trade credit insurance market has evolved in recent years and offers an increasing

range of products to cover not only UK Sales but also Export Sales on a 'Single Debtor', 'Selective

Accounts' or Turnover' basis wherever the company trades.

These products can also be used in conjunction with any invoice discounting or factoring facility the

company uses for working capital.

Obtaining a correctly packaged insurance policy requires expertise in the commercial trade credit

insurance market place.




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Export Factoring / Discounting Facilities

Most invoice factoring and discounting companies now offer export factoring and discounting

finance facilities.

The main differences associated with export factoring are:

1. The fees tend to be slightly higher

2. A minimum annual turnover of £100,000 is normally required but this can also include domestic

sales

3. Currency movements can affect profit margins and it is prudent to use currency hedging to

minimize risk

4. Credit insurance protection is often required to reduce the risk of bad debt

5. When shipping goods it is necessary to calculate accurately the number of funding days required

and agree them with the invoice factor or discounter. Typically invoices are funded for a maximum

of between 60 to 90 days, however from the point of dispatch to arrival with your customer may

take 90 days.

The customer then pays 30 days from the date of arrival so actual funding required would be 120

days to avoid re coursed invoices impacting on your availability and cash flow.

If you are importing goods we can also introduce you to trade finance specialists that can provide

trade finance facilities that will assist you with documentation (for example letters of credit and

bills of exchange) in addition to finance for your imports.

Single Debtor Factoring, Single Invoice Factoring & Transactional Finance

Businesses can sometimes require finance from a factoring company against a single customer

(single debtor or prime debtor). This may be due to a prime debtor concentration of trade into a

single customer, or seasonal trading peaks, or you may just want finance against one customer for a

specific project without giving the factor your whole sales ledger.

We are able to introduce you to companies that can provide finance against single debtors (prime

debtors) or even single invoices to improve your cash flow.




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Trade Finance

We can help you raise finance in respect of goods that you are importing from suppliers abroad or,

in respect of export sales, to customers that are based abroad (Export Finance). We can even help

with cross-border transactions where the goods move from one foreign territory to another.

This type of facility enables you to pay your suppliers on time whilst receiving extended credit

terms.

We at Augustus Hall Limited (RC. 912580) have access to specialist trade financing companies that

are experienced in all aspects of international trade such as letters of credit, bills of exchange and

import documentation.

We can introduce you to a trade finance provider that is suitable for your business. The cost of

trade finance facilities depends very much upon your requirements and circumstances.




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Invoice Factoring / Discounting Funding Terms: What Does It Cost?

Understanding the Charging Structure

It is wrong to assume that this invoice factoring or discounting finance is expensive as the product

is priced according to risk specific to your business and charges will vary from business to business.

There are three principal charges to be aware of:

1. The Service Charge & Minimum Annual Service Charge

The service charge, administration charge or credit management fee as it sometimes called will

usually be a percentage of the value of the invoices that are funded. This is an ongoing fee and in the

case o factoring provides you with the facility and a credit management service. In the case of

invoice discounting this provides the finance facility and the cost of the monitoring/auditing.

There is normally a minimum service charge quoted which is either charged monthly, quarterly or

annually and is calculated on turnover. This provides the factor with the minimum income they

expect from the facility and serves to protect them in the event that their client's turnover falls

short of the expected financial projections.

Typical factoring fees range from 0.75% to 2.5% of total turnover whereas invoice discounting fees

range from 0.2% to 0.5% of turnover which are significantly less but remember only finance is

being provided.

2. The Interest or Discount Charge

The interest or discount charge works in a similar way to an interest calculation and is based on the

funds in use. This charge is calculated at an agreed margin and typically ranges between 1.5% and

3% over bank base rate.




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3. Other Charges

There may be other charges which may or may not be explicitly stated within the quotation - it is

prudent to question the factor about these. These charges could include:

a. A re-factoring charge (an additional charge on debts reaching a certain age)

b. Charges in respect of electronic transfers or returned (bounced) cheques

c. "Trust Account" charges applied to the transactional activity of your invoice finance account

d. Small additional charges for credit insurance are also made if non-recourse factoring is used.

These will range from 0.5% to 2% of turnover depending on the level of risk the factor assigns the

arrangement

e. Arrangement Fee or Commitment Fee. There may be an arrangement fee or commitment fee.

Normally, an arrangement fee refers to a one off fee that is paid and not refunded whilst a

commitment fee may be refunded after commencement. You should question the factor about the

exact nature of such fees




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Understanding the Funding Proposition for Invoice Factoring or Discounting

Calculation of Availability

On commencement of an invoice factoring or discounting agreement the finance provider will make

available an early payment or prepayment percentage of your agreed outstanding sales ledger

which provides the initial cash injection on day one.

From that point onward you simply notify the value of the sales invoices that you have raised each

day, week or month. Based on the invoice values and cash received, the factor will create available

finance for you to use as you required.

It is not uncommon as the facility develops to be notified by the factor that certain invoices are

"unapproved" for funding. These "unapproved invoices" will affect the actual level of funding that

you are able to access and may include invoices still outstanding after 90 days or invoices raised in

advance of delivery. It is essential to question the factor about how they calculate the available level

of funding and understand the implications for your business.

In addition to the above, the invoice factoring or discounting facility may be subject to a restriction

against major debtors (prime debtor restriction or concentration reserve) or there may be

individual funding limits imposed in respect of each debtor, or credit limits if your facility is non

recourse (meaning it includes bad debt protection).

If your agreement is for recourse factoring, there will be a recourse period after which funding is

withdrawn. If it is non recourse, there will be a period after which the factoring company will pay

the balance of any covered debt to you under the terms of the bad debt protection that they are

providing (note for further detail on recourse and non-recourse factoring).

The invoice factoring or discounting funding terms may also state the maximum value of the facility

often known as a 'payment ceiling' or 'refer limit'. This is the maximum level of liability to the factor

that you may reach at any time. Bear in mind that this is only the maximum ceiling and does not

reflect the level of funding that you can expect to receive.




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Security Required By an Invoice Factor or Discounter

The main security that an invoice factor or discounter has is based on the trade debtors of the

business which are assigned under the terms of the financing agreement.

However, it is also common for secondary security to be supplied in the form of director's

warranties/guarantees.

Director's unsupported personal guarantees are occasionally requested to support the agreement.

'Unsupported' being a personal assurance to the value of £ X and not the charging of specific

personal assets.

It is often the misconception of directors that where personal guarantees are provided this is

merely to assure assistance to the factor/discounter in collecting in debts should the company

cease to trade. Whilst this guarantee certainly gives the factor the leverage to ask this of the

directors and is a significant motivating factor in their request of these assurances, it should be very

clear that a personal guarantee will give personal liability against the funds borrowed.

Whilst the factor/discounter will seek to collect monies in from debtors firstly they are fully

entitled to approach the directors for all or any of the amounts remaining outstanding.

Some factors will request director's warranties. These do provide director liability, although only in

certain circumstances detailed in the respective document. These often relate to circumstances

where fraudulent notification of invoices etc has occurred or cash has been misappropriated. As

such these are occasionally referred to as fraud warranties.

If you are unsure about the extent of your liability consult your solicitor before signing anything

that provides any personal warranty or guarantee.




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Business finance glossary of terms

Administration Charge

A charge by the factor on each invoice for the provision of the service.

Advance Billing

An invoice raised in advance of the provision of the service to which it relates.

Aged Debtors Ledger

A listing of outstanding balances per customer and split by either the month in which the respective

invoices where raised or the dates they become due.

Agency Discounting

Also referred to as disclosed invoice discounting. Where customers are aware of the factors

involvement, but the company maintain the responsibility of managing their sales ledger.

Approved Debtor / Balance

A customer approved by the factor for the advance of the agreed prepayment.

Asset Backed Lending

Lending by an institution where specific security is provided i.e. invoice finance, asset finance (HP

and leasing), stock finance. Opposed to lending under a blanket charge or debenture.

Assignment

The transfer of rights and benefit.




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Associated Company

To a factor these include; Parent Companies, Subsidiary Companies, Companies with Common

Shareholders, Companies with Common Directors, Franchisees.

Audit

An audit of the company's systems and debtors will be completed by the factor (usually every three

months). Ensuring continuing satisfaction with their security position. May also be terminology as

per 'survey' i.e. initial survey of systems and debt prior to the factor making a formal offer of

facility.

Availability

The amount remaining available to draw from the invoice finance facility, considering advances

may already have been made.

BACS Payment

Bank Automated Clearing System. A payment made or received through this system. Payments will

generally take 3 days to reach the recipient.

Bad Debt

An outstanding debt that will not be paid, most often given the cessation of the company invoiced.

Ban on Assignment (BOA)

A clause within a supplier's terms of trade that specifically bans the assignment of the benefits or

proceeds of the sale or contract.

Base Rate

Base funding percentage above which an additional margin is added by the respective lender. All

UK clearing banks currently operate with the same base rate determined by the Bank of England.




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CIS Certificate

Contractors within the construction industry are required by the Inland Revenue to deduct tax

when paying sub-contractors. Only if the sub-contractor has the necessary CIS certification can the

deduction be avoided.

This is therefore of relevance to a factor, if invoices they have financed are liable to deduction by

the customer (contractor).

The factor's security being eroded. Very simply: * CIS 5 certificate permits gross payment by the

customer * CIS 6 certificate permits payment gross to the company, but not to a third party, such as

a factor. * CIS 4 requires deductions of tax to be made by the customer. If the nature of the

company's business is subject to construction industry taxation then the particular certificate held

will determine which factors are willing to be of assistance.

Client

A company making use of a factor's service.

Collectability

The ease of collecting in the full value of outstanding trade debts in the hypothetical situation that

the company has ceased to trade. Affected by such issues as proof of delivery, disputes, contractual

obligations etc.

Concentration

Used in reference to the spread of customers by balances outstanding. Some factors will apply a

concentration limit, whereby should a single debtor exceed an agreed percentage of the total gross

sales ledger at any one time then the amount above this limit would become 'unapproved'.




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Confidential Factoring

An alternative expression for confidential invoice discounting. Some factors are considering the

provision of a true confidential factoring facility. That is, whereby the factor will complete the credit

control responsibilities, albeit as if they were the company.

Confidential Invoice Discounting

An invoice finance facility where the factors involvement is not disclosed and therefore remains

confidential from the company's customers. Also the credit management of the company remains

its own responsibility.

Consignment Stock

Goods provided to a customer for which payment is required only once they have been sold on.

Constructive Delivery

Goods held for a customer that have already been invoiced but have not been delivered but stored

on their behalf.

Contra Account

A customer that is also a supplier to the company.

Contractual Sales

Sales made within an over-riding supply agreement with the customer.

Control Account Summary

A monthly reconciliation of sales, credit note, receipts, adjustments completed by invoice

discounting clients for the factor to check against their records.




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Correspondent Factor

An overseas factor that is prepared to work with a UK factor to assist with the collection of export

debts. The reverse can also be true, that is a UK factor being the correspondent factor.

CPE - Credit Protection Element

The proportion of the administration charge applied to cover the provision of bad debt protection.

Current Account (Invoice Finance)

An account maintained by the factor in the name of the client for the recording of all transactions

between the factor and the client.

Debenture

A 'blanket' charge over all business assets registered at Companies House.

Debtor Credit Limit

Individual customers may be given a credit limit by the factor above which balances will become

unapproved.

Dilution

At any given time a debtor book against which the factor is advancing against will contain an

element of debt that is likely to be subject to credit notes, discount rebate or adjustments. The

factor will wish to establish this as part of agreeing the prepayment percentage advance against the

debtor ledger.




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Directors Warranty

Director's indemnity giving liability in the event of the company breaching specific clauses within

the invoice finance agreement. These usually relate to the fraudulent notification of debt.

Disclosed Invoice Discounting

An invoice finance facility that is disclosed to the customers of the company by way of a note on the

company's invoices. Unlike factoring the credit management remains the responsibility of the

company.

Discount Charge

Interest charge.

Discretionary Debtor Credit Limit

A minimum credit limit applied to all customers irrespective any individual credit search

information.

Dispute

A balance or invoice not accepted by the customer.

Doubtful Debt

A debt that has become doubtful that settlement will be made, given dispute or the viability of the

customer.

Drawdown

A request to the factor to transfer available funds from the invoice finance account to the company's

trading bank account.




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Dunning Cycle

This is industry terminology for the process and timescale of reminder letters, phone calls etc used

by the factor in the collection of outstanding invoices.

Export

The sale of goods or services whereby the customer company invoiced is outside the UK. Note this

may still be relevant if UK to UK supply but invoiced to an overseas registered company.

Export Factor

As correspondent factor. See above.

Factor

A supplier of factoring or invoice discounting.

Factoring

An invoice finance facility including the provision of a credit management service by the factor on

behalf of the company. A factor's involvement is disclosed to the customer.

Factors & Discounters Association

A members association acting on behalf of factors to promote their interests and the use of invoice

finance.

Fixed Charge

A specific charge against a named asset (i.e. debtors), registered at Companies House.




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Fixed Fee

Occasionally a factor will proved a fixed monthly / annual administration charge, as opposed to a

percentage fee.

Free Issue Material

Any material which is supplied by the customer to the company free of charge i.e. it will not feature

in the trade creditor's ledger.

Funding Limit

A 'review' limit may be applied to an invoice finance facility. It may therefore be possible that this is

lower than the total availability generated based on the company's outstanding debtors ledger and

agreed prepayment percentage. Often arises where sales grow faster than anticipated. Formal

approval by the factor should see this review limit increased.

Gross Turnover

Sales including VAT.

Ineligible Balance

A proportion of the sales ledger against which the factor will not provide finance against. See also

Unapproved Debt.

Invoice Batch

The notification to the factor of a number of invoices.




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Invoice Finance

The general term for either factoring or invoice discounting. A flexible and revolving finance facility,

providing cash for working capital and other business uses by utilizing a company's outstanding,

unpaid customer invoices as security for the lender.

Loan Subordination / Postponement

The agreement by directors or associated businesses of the company not to withdraw loan money

invested in the company unless agreed to by the factor. The subordination of loans can often give

the factor comfort to assume these as 'quasi' capital.

Maximum Extension Period

Period beyond the invoiced terms of trade at which, under a non recourse (insured) facility, the

factor will settle the outstanding customer invoice. Note, not relevant where a customer dispute

exists. Not all factors non recourse terms allow for this 'protracted default' cover.

Minimum Administration Charge

A minimum charge applied to the administration charge assessed annually. Should the percentage

administration charge applied to gross turnover result in the payment of charges below the

minimum charge then the company will be required to pay the difference.

Minimum Period

The minimum period of an invoice finance agreement. Usually 12 months. Termination of the

agreement by the company before the minimum period expires will result in the factor applying an

early termination penalty charge.

Net Worth

The net asset position of the company. Total company assets less total company liabilities. Capital

account in the case of sole traders and partnerships.




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Non Recourse

Without recourse to the company. An invoice finance facility provided where the company's

debtors are insured by the factor. Debts are therefore at the factor's risk, within agreed credit

limits, once notified to them. Company risk remains in the event of a customer dispute.

Notification

The advice of new sales invoices / values to the factor to update the sales ledger and availability.

Offer

An offer of facility by the factor to the company. Care in that some offers can still be subject to

certain conditions such as a satisfactory survey, credit approval and are therefore little more than

an indication of facility. The majority though are formal offers.

Open Item Sale Ledger

The accounting for of sales by which all outstanding, invoices and credit notes are detailed, as

opposed to balances only.

Overpayment

The agreed payment by the factor to the company of funds, although above the funding limit or

agreed prepayment percentage.

Preferential Creditor

Crown creditors. HMC&E (VAT) and Inland Revenue (PAYE)

Prepayment

Percentage advance of finance against the value of outstanding debtors.




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Prime Debtor

Company's largest debtor by value of the total balance outstanding, as per concentration.

Proof of Delivery (POD)

An important document for the factor let alone the company. Substantially assists 'collectability'

(see above). Includes customer signed delivery note, carrier note, timesheet, weighbridge ticket etc.

Protracted Default

Some factors non recourse (insured) terms include for payment to the company of balances

outstanding having reached an agreed period (Maximum Extension Period) still unpaid. This may

be in the region of 120 - 180 days from the original due date for payment of the invoice. Does not

include for issues of customer dispute.

Receivable

Debtor balance. 'Receivables Finance' - US terminology for invoice finance.

Reconciliation

Balancing of invoice discounting notifications. Provided monthly by the company to the factor. See

Control Account Summary

Recourse

The right of a factor to return invoices should the debt proves to be a bad or doubtful debt. The

business risk is therefore that of the company.

Recourse Period

The period that invoices are financed for before being recoursed back to the company. This is

typically 90 or 120 days. In practice this is held as a reserve against the current ledger rather than a

physical return of funds.




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Re-Factoring Fee

An additional charge applied by some factors, under a factoring facility to the value of invoices

recoursed (see above). This is usually those older than 90 or 120 days.

Retention of Title (ROT)

A clause contained in terms and conditions of sale which reserves title to the goods until payment is

received. This may include the right to the proceeds of the sale of the goods.

Retrospective Rebate

A volume discount given to customers.

Scheduled Order

An order received from a customer specifying delivery of various quantities over a given period.

Self Billing

An invoice raised by a customer, for payment by the customer to their supplier.

Settlement Discount

A rebate allowed against the gross value of an invoice for settlement within a given period.

Special Retention

An amount of the sales ledger set aside for which the factor will not permit finance against. Unlike

an unapproved balance this does not relate to a specific sales ledger balance, but another reason

specified by the factor.




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Stage Payment

The payment for a particular order in stages i.e. 30% on order, 60% on delivery 10% after 30 days.

Survey

An audit is very often complete by the factor of the company's systems and debtors before

approving the provision and terms of an invoice finance facility. Usually completed at the premises

of the company.

Take On

The commencement of the invoice finance facility.

Take On Balance

The sales ledger balance at the commencement of the facility against which the factor will provide

finance.

Termination Period

Period of notice required to be given by the company to the factor as notice of their intent to cease

their invoice finance agreement. Usually subject to an initial minimum period of the agreement.

Trade Creditor

A supplier to the company with who balances are outstanding under credit payment terms for

settlement of outstanding invoices.

Trade Debtor

A business customer of the company with who balances are outstanding under credit payment

terms for settlement of outstanding invoices.




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Transfer Charge

The charge made for drawing funds from your invoice finance facility to the company's trading

account.

Trust Account

The invoice finance 'bank' account

Unapproved Debt

Trade debt that is not approved for funding by the factor i.e. the prepayment is not permitted

against this element of debt.

Unprocessed Balances

The total value of any invoice notifications still waiting to be processed by the factor.

Value Date

The date receipts are considered accepted by the factor for the purposes of calculating interest

charges.

Waiver of Book Debts

A factor will require the agreement of any existing charge holder (i.e. company's bankers) to waive

their interest in respect of debtors.

Work In Progress

Work undertaken for a customer on an ongoing basis where invoices are raised for measured or

estimated work completed to date.

Business Finance Services - A Guide to Factoring and Invoice Discounting

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Transcript of Business Finance Services - A Guide to Factoring and Invoice Discounting