Factoring, Invoice Discounting & Trade Finance
Trade Finance
Trade or 'transaction' finance is suitable for import and export goods bought and sold in the UK, even if the goods never actually touch the UK or Ireland. Ideal if you can't get sufficient credit from UK suppliers, this form of finance is increasingly popular with new businesses, re-started businesses, those with CVAs and rebuilt companies. The goods don't always have to be pre-sold and the trade finance system can be used when the client both supplies and fits the goods. It's also common for an 'open account' to be agreed on the terms of a supplier undertaking (SU) for both the UK and overseas.
Alternatively, if you buy a large amount of goods in the UK which include VAT, but then sell these to foreign customers without VAT, we know that the delay in accessing your rebate can cause problems with cash flow. VAT export finance could be just the solution you need, and our expert commercial finance specialists will be happy to talk you through the process. Simply call now to find out if your business is eligible.
Trade finance can also take the form of advances against credit sales, which is a debtor-based working capital finance that doesn't affect your existing bank facilities. The process is clear and simple; you invoice the third party for goods supplied, and they pass on the invoice to your customer. As soon as they know that your customer will pay, they release the funds to you – not only does this speed up your cash flow, but BWG will only use the most experienced companies who specialise in this kind of finance, allowing you access to the very best. It can be used for goods and services, and is particularly popular in industries such as construction. Call us now to find out more.
Invoice Discounting & Factoring
There are usually two costs involved when you use invoice discounting; service charges which take the form of a flat fee or a percentage of the invoice amount, and an interest charge which is usually similar to bank overdraft rates.
The process is simple: you prepare your invoices and send a sales daybook listing to your invoice discounter, who can then advance you up to 85% of the gross amount. You then send out the invoices and pursue payment as usual, and once you have received the payment you put the cash in a trustee bank account. The invoice discounter takes their charges, then returns the balance to you.
Invoice Factoring
Factoring is a finance facility which is linked directly to the invoices you issue. It has the advantage of providing cash to your business without any time delay waiting for payment, and is more popular than you may have thought – invoices worth £60 billion were processed last year alone!
The initial process is the same as invoice discounting; you raise an invoice and issue it to the factoring company, who then advance you an agreed percentage of the total gross invoice value (usually 70% to 85%). But this is where it differs – the factoring company will then send out statements and collect the cash invoiced, sending you the remaining balance once their fees have been paid, the invoice factoring rate varies of course depending on the business type and the factoring company being used.
The Benefits of Invoice & Discount Factoring
You can usually draw down monies within 24 hours of preparing an invoice, and you only pay interest in the amount you choose to take. The factoring or invoice discounting facility grows directly in-line with your sales growth too, so there's no need to renegotiate the agreement as there would be with an overdraft.
There are considerable cost savings to be made by taking advantage of these facilities, not least for SMEs the fact that a factor can take over the whole payment process post-invoice, which means that there's no need to take on a specific person to fulfil the role, and you have access to highly-qualified professionals. Their expertise can also mean a reduction in bad debts, because the factor team are experienced in administering and collecting payment in a timely manner, and a reduction in management time, because you won't have to deal with invoice disputes or risk your relationship with clients over chasing payment.
The Costs of Invoice & Discount Factoring
As you'd expect, the more the invoice discounter or factor does, the more the cost, but these can usually be divided into two categories: a service charge which is typically a percentage of the invoices and is dependent on both the number of invoices and the number of clients; and an interest charge based on the actual amount you draw down. You could also take out insurance or bad debt protection which provides some cover in the event of non-payment by your clients.
The Options
You can have recourse or non-recourse factoring, with the former providing no protection from bad debts, and the latter providing full protection. Non-recourse factoring usually involves credit insurance, which is an extra cost, but the greater the quality of your debts, the less you have to pay.
If you don't qualify for invoice factoring because of the level of your turnover, and have a well-managed sales ledger function with a very large number of invoices, then confidential factoring could be the solution. If, in addition to this, you have an overseas customer base, international factoring may be suitable. Call our expert commercial finance team now to find out which solution would suit you best. Call us now to find out more.
