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• 07 Feb

  Comparison of Invoice Discounting Funding Percentages

  Looking to use invoice discounting? Find a provider that will be flexible and release the maximum percentage of your unpaid sales receivables. As with all aspects of the facility structure e.g. pricing, premiums for debtor protection, discount charge and facility limits, there are differences between providers, and what they will quote when it comes to funding levels.

  My recent blog post compared different approaches to setting facility limits, this one looks in more depth at prepayment percentages.

  Comparing Prepayment Percentages

  One of the "acid tests" to demonstrate the flexibility of a provider has to be the level of prepayments that they will quote as a default. Below we look at the invoice discounting percentages that they are likely to offer.

  Looking back at a recruitment sector business that we sought quotes for recently, we were able to make a comparison between the headline rates of prepayment that were offered.

  The majority of providers quoted an 85% prepayment percentage immediately although just under a third of the quotes received came in at 90% immediately.

  As explained in my other post, that additional 5% could result in a significant amount of extra funds released i.e. up to 5% of the value of your sales ledger.

  You could argue that those that immediately offer a higher funding level are likely to take a more likely to be able to take a more flexible approach to funding levels but it is not a guarantee.

  Funding Restrictions & Flexibility

  The other issue to consider, before comparing providers purely on the prepayment percentage, is the presence of any other restrictions that will affect the level of funding released.

  Your sales contact or an invoice finance broker should be able to explain these to you.

  These issues could include:

  • Prime debtor restrictions - these are restrictions that can bite against the funding released in respect of any single debtor that represents a large proportion of your overall sale ledger. This type of restriction can significantly reduce the actual percentage received.
    
    
  • Funding limits - these can be applied individually against customers and may be called credit limits. They can limit the level of invoicing that attracts funding, bringing down the actual percentage released.
    
    
  • Facility limit or payment ceiling - this is a limit on the total amount of funding that you can draw. Normally these limits are not a problem and can be increased to allow maximum funding, however, in some cases they are used to limit and control funding levels.
    
    
  • Retentions or reserves - these can be amounts withheld from your funding calculation for a particular purpose e.g. to offset the effect of contra-trading, or other dilutions that your funding company anticipates.
    
    
  • Disapproved, excluded or unapproved items - these are all terms for invoices, or debtors, that are removed from the funding formula. The reason for these could include the age of invoices or the type of transactions that are being invoiced e.g. contractual debts may be excluded by some providers.

  You can only understand the true level of prepayment that you will receive once you account for any funding restrictions that are going to be applied. There are many different funders in the market that will take different approaches to funding. For example, we have finance partners that will fund single debtors and contractual debts, whereas others may restrict funding against such transactions.

  The other consideration is how flexible they will be if your business runs into problems and needs so more help. Some providers have offers of up to 120% funding when coupled with other forms of asset finance but not all providers will take the same risk stance if you need additional help.

  By Glenn Blackman