What Should You Consider When Setting Up An Invoice Finance Facility?

When setting up an invoice finance facility there are several things that should be considered. This is not helped by the amount of jargon and the fact that all the invoice finance companies will be telling you why their facility is the best.

Let’s take a look at the different areas you should consider:

1. Product

You need to consider what product you actually want and why. Do you want a factoring facility where the lender offers a credit control service as well as funding against your invoices? It may be that you want a confidential facility because for whatever reason you do not want your customers to be aware of the lenders involvement. Do you want bad debt protection because you want to reduce the risk of bad debts? It may be that you want a simple invoice discounting facility to reduce costs. I think the first port of call is to understand what you actually want from a facility and then consider your options from what the market can offer you. At Funding Solutions we would be delighted to discuss your options with you.

2. Structure

In our opinion structure is incredibly important and arguably the most important consideration. The structure of the facility will determine how much cash a facility will generate. A poorly structured facility will be unlikely to meet your needs and expectations with regards to cash generation. It is not uncommon when comparing facilities to see a well-structured facility generate 3 times as much cash as a poorly structured facility. You really must ensure that any facility is structured in a manner that minimises and restrictions. Potential restrictions include export caps, concentration limits, individual debtor limits and overall facility limits. Again the team at Funding Solutions would be delighted to assist.

3. Price

While an invoice finance facility can finance growth which hopefully increases profits the costs associated can obviously reduce those profits. It is imperative that you understand how costs are calculated and levied against the facility. It is also important you compare costs correctly. When comparing invoice finance costs it is important that you compare total costs and not just headline rates. We are experts at making direct comparisons between different facilities and we can ensure that you enter into any facility with your eyes wide open.

4. Service Levels

This is important too. Let’s assume that you are comparing two different factoring offers. You have looked at both price and structure and both seem similar. It is important to understand what you are actually been offered. One lender may simply send out automated letters and end of month statement whereas the other lender may actively call each customer on the due date of the invoice just to ensure there are no issues. The latter is obviously a much more hands on service and could represent better value to your business. No matter what invoice finance facility you choose it is important to consider service levels alongside price to ensure you get good value.

5. Security

Different lenders require different types of security and this can differ depending on the type of facility you require. It is important you understand what the implications are for the different types of security you may be asked for. Security can take the form of unsupported personal guarantees, warranties and indemnities, fixed and floating charges, second charges on property and others. It is important that you understand when and how that security may be called upon.

6. Responsibilities/Requirements

Most facilities will have ongoing requirements possibly regarding the performance of the business or perhaps in terms of reporting. It is important that you understand what those requirements are. This will ensure a smooth relationship and will avoid you getting involved with a lender that requires too much information. One lender in particular asks for weekly bank statement and monthly management accounts. If you miss either there is a penalty charge of £350. This is an extreme case but you can see what type of thing you need to look out for. Other considerations are performance criteria such as dilution targets, debt turn targets and profitability requirements.

As you can see there are some very serious considerations. In some instances the cost of getting it wrong can be catastrophic but at best it is time consuming and frustrating. At Funding Solutions our aim is to walk you through the different options so that you can make an informed decision.