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• 20 Sep

  Common Mistakes About Factoring And Invoice Finance

  

  Misconceptions about invoice finance, invoice discounting and factoring are common as these services are not universally known to UK businesses. Previous studies* have suggested that as many as 1 in 3 may not have heard of these products. Furthermore, even fewer understand the nuances of how these receivables financing facilities work.

  Common Mistakes And Misunderstandings About Factoring And Invoice Finance

  Below we have addressed a number of the most common misunderstandings, misconceptions and mistakes about invoice funding that we regularly come across.

  WRONG - If You Are Funded At 85% You Lose 15%

  Prepayment percentages against invoices vary according to your sector and the nature of your trade. Typically they vary from circa 70% in the construction sector up to 95% for staffing agencies and even 100% for some sectors (minus the fee).

  Therefore, if you have a prepayment facility of 85%, you should be funded £8,500 against a £10K invoice. The remaining 15% (£1,500 in this example) is NOT the fee! This will be passed to you, less the fees when your debtor pays.

  Typically, you might pay a few percentage points as the fee with a discount charge against the amount of funding that you draw down (this works in a similar way to interest on an overdraft). You DO NOT lose the balance of the invoice value. The remainder of the invoice value is passed to you when your customer pays (less the fees).

  LIMITED UNDERSTANDING - If Your Debtor Doesn't Pay You Are Always Responsible

  With a recourse factoring or recourse invoice discounting facility that is the case. The funding is removed after a specified recourse period if the customer fails to pay.

  However, there are also non-recourse options. With a non-recourse facility, you also have bad debt protection. Providing you trade within a preset debtor credit limit, your invoices are "covered". If your customer becomes insolvent and can't pay, the funder takes on that responsibility (less any first loss provisions that may apply).

  INCORRECT - Only Banks Offer Invoice Finance

  The majority of the UK receivables financing providers are not banks. Many are what we call "independent" invoice finance providers that are not owned by banks. There are also bank-backed/owned providers that transact a lot of business within our sector, however, it is not the case that you can only get invoice finance from banks.

  POOR KNOWLEDGE - Directors Will Have To Provide Personal Guarantees For The Full Value

  Directors are often required to provide a personal guarantee in support of their receivables financing facility. However, in many cases, this is limited to a maximum value that is far below the total value of the facility. Also, there are invoice financing companies that do not require a personal guarantee from the directors at all.

  LACK OF MARKET KNOWLEDGE - You Have To Be A Homeowner To Get Receivable Finance

  Another common misconception is that you have to be a homeowner to get a receivables financing facility. This is not the case with all providers. There are funders that will accept clients where the directors are in rented accommodation and are not property owners.

  Need Further Expert Help?

  Hopefully, that has addressed some of the more common misconceptions that we hear from prospects. If you need to discuss your requirements with an expert, please get in touch with us on 03330 113622. We may be able to assist you even if you have already been turned down by one or more providers.

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  Source - * FundInvoice | Please Help Raise Awareness Of Invoice Finance - #IFaware 

  By Glenn Blackman