Invoice Discounting for UK businesses

How Invoice Discounting works

1 The client sends his customers invoices for completed work.

2 The client sends a sales day book listing to the discounter.

3 The discounter pays up to 85% of the invoice values to the client.

4 The client runs the sales ledger - telephone / statements.

5 The client collects payment from the customers, banks the payments into a trust bank account and notifies the discounter.

6 The discounter collects the funds from the trust bank account and releases the balance of 15%, less charges, to the client.

Obviously in most cases there will be an existing sales ledger in place at the time when an invoice discounting agreement commences. In this case the discounter can make available funding of up to 85% of the qualifying book debts, which in many cases can provide a healthy cash injection, even when existing bank overdrafts have to be repaid.

There are two main charges in invoice discounting agreements :-

• Service Fee - This is a percentage charge on the clients actual turnover ; usually 0.1% to 1.0% of invoice value.
  
  
• Cost of Money - This is an interest charge on the funds advanced by the factor ; usually 1.5% to 2.5% over bank base rate. This charge is usually quite competitive when compared to bank overdraft rates.     

Criteria Guidelines

The items below are not exhaustive and it is obviously always the discounter who will make the final decision on what is suitable for them or not :-

• Mainly Limited Companies, but is possible for Sole Traders and Partnerships.
  
  
• Turnover range £250k up to £100m.
  
  
• Can be Confidential or Disclosed.
  
  
• Profitable Trading history preferred. Usual minimum net worth requirement £10k disclosed, £50k confidential but lower figures considered.
  
  
• Ideally at least 5 to 6 live customers on the ledger preferred but fewer considered.
  
  
• Funding levels usually from 50% to 85% of invoice value.
  
  
• Trade credit sales only can be factored not debts to the public.
  
  
• The business must be able to demonstrate good sales ledger management systems.
  
  
• Both UK and export debts can be funded.
  
  
• Increasingly popular in the funding of MBO/MBI.
  
  
• The range of discountable industries continues to increase so please call us for up to date information on whether your own is suitable.

Other considerations

Invoice discounting is the fastest growing sector of the UK sales linked finance market. As such the ability to package deals with this product is becoming increasingly common.

By taking an all assets debenture some discounters are prepared to include stock and other assets as part of their security, which can mean that total funding levels quoted against book debts can now exceed 100% of the ledger value.

One other area of note is the increasing availability of Trade Finance from UK funding institutions.

This is of particular interest to businesses, which have to import or purchase domestically, large quantities of finished goods or raw materials, for which they then have confirmed orders from creditworthy customers. The Trade Financiers are usually looking for minimum order values of £20/30k and preferably repeat business throughout the year. They will basically step into the client's shoes and purchase the goods initially and handle the financial process until they receive payment directly from the end customer.

The Trade Financier then deducts the original purchase costs plus their charges and the balance is paid back to the client.

As the process is a transactional one based very much on the strength of the end user this facility is particularly useful for businesses whose own balance sheet is not strong enough to support the level of funding required. In particular it can be very helpful as part of a funding package for a new start business.