Factoring and Invoice Discounting Factoring is the process of releasing cash from invoices as soon as they are issued, allowing you to use the money immediately. Normally, when you issue an invoice, you have to wait to get paid, often 30 days or more, and you frequently need to chase payment. For a small to medium sized business this could have a negative effect on your cash-flow. Factoring can release up to 85% of the value of an invoice within a couple of days of the invoice being issued; typically you could receive cash advances within 24 hours. In addition to the release of cash from qualifying invoices as soon as they are issued, a factoring service can help with the management of your sales ledger, in which you can outsource the running of your sales ledger and payment control services (the management of invoices and the collection of unpaid invoices). In many cases, factoring is more cost effective than taking on extra personnel and purchasing technology to help in the management of your sales ledger.

Invoice Discounting Overview
Invoice Discounting allows you the opportunity of raising finance on unpaid invoices and it is one of the largest and rapidly growing forms of commercial finance, providing increased flexibility to borrowers.

Many medium sized companies require a more flexible form of finance than traditional cash flow-based lending, such as business overdrafts. Invoice discounting allows you to use what may well be the biggest asset on your balance sheet, your receivables, as security against a loan facility.

Factoring is another popular form of invoice finance; however, factoring is suited to smaller companies and those companies who require assistance with their sales ledger management. Invoice discounting offers little assistance with sales ledger management (apart from credit control) as most medium to large companies have full time financial controllers or entire departments to handle this facet of their business administration.

How Invoice Discounting Works
You complete work or deliver goods as agreed in contract with your client and inform the invoice discounter that an invoice is required for your client. The Invoice Discounter raises the invoice and confirms that you are due an advance on the payment. You are paid in advance (possibly within 24 hours after you notify the Invoice Discounter that the invoice has been raised). The client pays the invoice (collection of debts is usually left to you) and the Invoice Discounter deducts their fees before paying you the balance.

There are different types of invoice discounting which may be offered to you by the discounter:
• Recourse Invoice Discounting – where a discounted invoice remains unpaid for more than the agreed period (between 90-120 days), the discounter will pass ownership of the invoice back to you and you must refund the advanced cash. You will also be subject to a charge.
• Non-recourse Invoice Discounting – this is a credit protection policy used in conjunction with the invoice discounting service to ensure that, on all agreed invoices, there is no recourse back to you if your client fails to pay (for circumstances such as insolvency or dispute). An additional fee of between 0.25-0.75% will be charged per invoice for this service.
• Confidential Invoice Discounting - for businesses that choose to use invoice discounting but prefer that their clients are unaware they are using an invoice discounting service. It allows you the ability to collect your own outstanding invoices or have the discounter perform this service as if they are a direct employee of yours.

Invoice Discounting and Asset Based Lending
Many invoice discounters now offer asset based lending services to their invoice discounting clients who require more cash than advances, for example property, plant & machinery and stock.

Asset based lending - some key advantages:
• a diverse range of assets can be used
• traditionally "non-fundable" assets will be considered
• the facility is flexible, assets can be added
• you will not be tied-in for long periods of time
• it saves time

Some disadvantages:
• it may be more expensive than individually securitising assets
• leverage on assets such as machinery is lower than normal asset finance
• rates may be higher than other types of finance such as commercial mortgages
When choosing between invoice discounting or asset based lending you should consider what is best for your business needs and whether these needs are likely to change in the short term.

Advantages of Invoice Discounting
• Fast access to the cash tied up in unpaid invoices with advances being paid as fast as 24 hours.
• Does not need to be renegotiated on a regular basis like an overdraft.
• The facility size can move up and down as you require.
• Can be used as the principle asset in an all asset based lending facility.

Disadvantages of Invoice Discounting
• Invoice discounting is more costly than some other types of secured lending such as commercial mortgages and asset finance.
• Does not offer a complete sales ledger management service as factoring does.
• It takes time to set up the discounting software and to load each invoice as they are raised.

Written quotations are available on request. All loans are subject to status. A valuation or survey fee may be required. An administration fee may be payable.