The principle methods of financing working capital requirements are;
- Invoice factoring - either confidential or disclosed.
- Invoice discounting
- Trade finance
Invoice factoring provides an immediate injection of cash secured against the value of trade debtors, typically up to 85% of the total. The balance (less costs) is paid when the customer pays his bill. On an ongoing basis cash is available immediately to the agreed percentage of new invoices raised, again with the balance (less costs) paid to you when the customer pays. Additionally the factor manages the sales ledger process by chasing overdue payments, sending out statements, and processing payments, and this can eliminate the necessity for an in-house team undertaking the same work. Factoring is typically with full recourse to the supplier if an account goes bad, but non-recourse factoring can also be arranged, thus providing protection against bad debts. The factor will normally act in their own name when dealing with customers, but confidential factoring is also available – in this case everything the factor does is in the name of the company, and the customer is unaware the debt has been factored.
Factoring costs are very competitive compared to other types of business finance. Fees charged are in two parts – a service fee which covers the costs involved in running the sales ledger plus the collection processes and this is negotiable ranging from 0.5% to 3% of turnover, and an interest charge for funds advanced which is normally in the range 2% to 3% above Bank of England base rate.
Invoice discounting works on the same principles as factoring, with the exception that you are in control of the collection process. Invoice discounting is not normally available to very small companies (turnover below £600K per annum) as the discounter relies on his customer having adequate processes, staff, and procedures in place to run an efficient sales ledger. Confidential invoice discounting is also available. The service fee is normally significantly less than for factoring, in the range 0.25% to 1% of turnover.
In association with leading providers of invoice finance NFS can now offer invoice based finance packages to the following specialist companies:
- Construction Finance - this is offered to sub-contractors working under industry contracts, and funding is offered from the point an application is submitted (not when it is certified) up to 70% of the application.
- IT Finance - offered to IT companies working under contract, up to 70% advance against stage payment invoices.
- Recruitment Finance - offered to independent recruitment agencies, from commencement of operations, up to 100% finance against invoices raised.
Additionally NFS can offer:
- Export Finance - UK businesses trading business to business overseas, up to 85% of invoice value can be advanced.
- Import Finance - finance is offered on finished, non-perishable goods with a gross margin of 20% or above, and up to 80% of confirmed customer orders may be financed.
Trade finance is available to cover situations where a large order has been received but cannot be processed due to lack of working capital. In such situations the finance house will make available up to 80% of the confirmed order value to enable your suppliers to be paid. You will then complete the order, invoice the finance house, and the finance house invoices the customer upon acceptance. Once payment is received from the customer you are paid the balance owing less costs. Trade finance is often used in association with discounting or factoring.
Asset based lending is becoming increasingly popular, for three main reasons:
- It allows companies to leverage greater funds than they could with traditional forms of lending. As the volume of business increases, so does the finance facility - unlike bank loans or overdrafts which will require to be renegotiated.
- Banks are increasingly demanding personal guarantees on loans.
- It is difficult for companies to overstretch on asset based loans, so repayment is rarely an issue. In most cases it becomes a revolving facility, with funding increasing in line with assets.