Factoring & Invoice Discounting in the UK

10 Tips Before You Sign an Invoice Finance Facility

Invoice finance is a great business tool to help improve cash flow. Banks and a growing number of independent lenders have developed facilities with a range of complex terms and conditions. Just Factoring have compiled this Top 10 Tips. It is not definitive but will help you find and negotiate the best deal for your business.

  1. Find out how much money you can raise. The main motive for an invoice finance facility is to generate cash. Don’t use online calculators because they don’t take into consideration your specific sales ledger risk to lenders. You need to establish what percentage of invoice value is realistic. As brokers we often see lenders quoting up to 95%. If your debtors are perceived as higher than average risk or your business is a start up then the actual amount could be much less.
  2. Understand the costs involved in your facility. Be aware of ALL the costs, not just the headline service charge & interest rate quoted – this means looking deep into the agreement! Invoice finance facilities vary from product to product. You need to know what questions to raise before you meet with a lender and get quotes. Talking through your specific business needs together with the facilities available can help you organise your questions and be fully prepared.
  3. Don’t breach your agreement. Once up and running you must comply with the terms of your agreement. We have seen clients slip up and incur additional costs through silly processing mistakes. Get your clerical staff trained to execute the process correctly.
  4. Check carefully the base rate applied to your agreement. Lenders will quote an interest charge usually as Base Rate +. Check the base rate applied
  5. Know your personal and corporate risks. Make sure you know the full implications of any guarantee you have been asked to provide as a condition of your agreement. We would always advise that you seek independent legal advice should personal  or corporate guarantees be required.
  6. Check the contract length. You should consider the time period of your agreement carefully. If you have been offered a fantastic deal then a 3 year agreement may work in your favour. If not then change the terms according to your growth plans and objectives. It is always worth contacting your broker for additional feedback.
  7. Talk to some existing clients. Any prospective lender should offer you some names, these will obviously be names the lender knows will be favourable but it’s still worth a few minutes. If the lender can’t, or wont, then beware! As brokers we constantly get feedback from clients about lenders. On the whole most provide a good service. Most problems occur when your account is too small, too complicated or too big for the lender. A broker can help match your needs and situation with the most appropriate lender.
  8. Review your lenders collection service.  This is only for ‘factoring’ but you will need to find out and understand your lenders actual collection process. Ask what the average collection period is, Factoring companies should pride themselves on their ability to collect outstanding invoices. Will the same person handle all of your collections? Can you vary collection terms according to your needs? Do they make phone calls or just send our reminders by post? How will you indicate which customers are most important to you?
  9. Be clear about termination clauses. How easy is it to get out of the contract if you decide it simply isn’t for you. These can vary dramatically between lenders.
  10. Speak to an independent broker. You need to know what a realistic deal is going to look like before speaking directly with lenders. If you run through the options and iron out concerns prior to commencing negotiations you will get a better deal, find the process easier, save time and feel more confident about the outcome.  Therefore make sure the broker is truly independent. Some brokers are owned by factoring companies or insolvency practitioners where any conflict of interest might restrict the lenders recommended.