The world is definitely not short of invoice finance comparison sites. As expert brokers, we believe comparing the market online can only get you so far in finding the solution that best fits your business. Talk to us and you’ll get specialist advice on the optimal invoice finance products and rates out there. We’re independent, so our advice is completely impartial. It’s also 100% free.
To help you on your way, here are 3 things to bear in mind when comparing invoice finance providers.
A few initial questions will help with this one:
Are you interested in factoring or invoice discounting?
Factoring tends to be used more by smaller businesses. Invoice discounting is usually reserved for larger companies – it typically requires an annual turnover in excess of £400,000 as well as over a year’s trading and use of an accountancy package like Sage, Xero or QuickBooks.
While invoice discounting is confidential (since you stay in charge of invoice collection), factoring involves outsourcing your credit control to your funder and this arrangement will be disclosed to your customers. For factoring clients who want to preserve confidentiality, confidential factoring (or ConFac) is an option. Likewise, factoring clients can also retain control over customer payments by using a product called CHOCCS (Client Handles Own Credit Control Services).
Are you looking to fund all of your outstanding invoices, or only some of them?
If it’s the latter, you may wish to consider selective invoice finance (where you select which customers/invoices to fund) or spot factoring (used for single invoices only).
Bear in mind, though, that selective invoice finance tends to be significantly more expensive than a full turnover solution. Of course, if you only have one inquiry (or a very ad-hoc need), it may be more cost-effective. If, however, you require the factoring facility on a monthly basis, a full turnover facility could provide you with greater funding at a cheaper rate.
It’s important to understand how the invoice finance providers make their money so you can compare them like-for-like. This is especially true since some providers might express their fees differently to others.
Essentially, the fees you’ll pay can be broken down as follows:
Discount rate – despite the name, this is actually a charge, expressed as a percentage of the amount advanced to you. The funder charges the discount rate monthly. Like a bank overdraft, the charge itself is calculated daily.
Service fee – (much simpler this one) this charge covers the servicing of your finance facility. It’s charged as a percentage of the gross invoice value, whether you choose to draw down or not.
Due diligence fee – this fee covers the cost of the customer credit checks and other due diligence required before your funds are advanced. (This charge is usually bundled within the service fee.)
Additional charges may include renewal fees or termination fees. It’s also crucial to check whether your quotes include bad debt protection as a safety net against customer non-payment.
As you can see, it’s important to consider the full fee structure when comparing invoice finance providers. This is where a specialist broker can help.
Another area where an independent broker can help is negotiating the terms of your invoice finance contract. There are 3 key areas to bear in mind before you sign on the dotted line.
The advance rate and credit limits
As the name suggests, the advance rate is the rate at which the funder is prepared to advance the value of your outstanding invoices. The advance rate can be as high as 95% or even 100%, but a typical rate is usually around 90%. For higher-risk industries like construction, this drops to between 50% and 80%.
The advance rate isn’t the only thing to consider. Pay close attention to any customer credit limits, too, as they’re a clear sign of how creditworthy your customers are in the eyes of the prospective funder.
Invoice finance providers are also likely to impose what’s called a concentration limit on how much debt can be exposed to a single customer. The concentration limit is typically around 30%, meaning that the lender is only willing to fund up to 30% and no higher. If you’re a smaller business that’s just secured its first major commercial contract (taking your exposure to a single customer above the 30% mark), you’ll want to ensure the invoice financing facility you choose has an appropriate concentration limit. That said, invoice finance providers can fund customers with a single client, removing the concentration barrier. Speaking to a specialist like us can ensure you are engaging with the best-suited providers from day 1 and not wasting any of your time.
For smaller businesses in general, it’s also worth considering funders whose service fees include bad debt protection. That way you’ll be covered against any losses from customer insolvency or default. Some funders will insist on these measures being in place, as it’s in both your and their best interest from a risk management perspective.
The contract term
The typical contract length for invoice finance is 12 months. However, based on our industry experience, we’ve been able to secure 6-month trial periods for clients wanting to test the water before committing to anything lengthier.
It’s also important to identify any costs associated with early contract termination.
The security required
Whenever a business borrows money, it’s extremely likely that some sort of personal guarantee (or PG for short) will be required.
In factoring, the main security for the lender is the outstanding invoices. The purpose of a PG is that if an invoice dispute arises, the business’s management team has a commercial interest in ensuring the funder recovers the money. If the funded business were to go bust, ultimately as long as the outstanding invoices are paid, the PG becomes irrelevant. This differs from a bank loan scenario, where there may be no other security to lean on except the PG from the owners.
One final consideration here is recourse versus non-recourse invoice finance. Under a recourse invoice finance arrangement, if a customer is unable to settle an invoice payment, the lender will return to you for repayment. Non-recourse invoice finance, on the other hand, means that this credit risk is borne by the lender instead and settled on your behalf.
As you’d expect, non-recourse invoice finance is the more expensive of the two, given the additional risk taken by the funder.
Invoice finance can be complex and overwhelming. We’re here to help business owners cut through the noise and find the best rates and terms for them. Our advice is 100% independent, and because we’re paid on commission from our funders, it’s also 100% free.
Invoice Finance is a perfect way to help your business manage cashflow and to remove the headache of late payers. There are a number of ways that an invoice finance facility can be structured and it can be tailored to your preferences.
Why not try our “help me choose tool” to allow us to support you in making the right decision for your business in 4 easy steps?
