Factoring Invoices – Do I Have to Factor All My Invoices?

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We are often asked if when factoring invoices you have to notify all your invoices. The short answer is, ‘No‘.

When factoring invoices you have a few options ranging from financing a single invoice through to a whole turnover agreement. If you want to discuss your options call us on 0845 251 4040.

Let’s look at the different options available to you:

Whole Turnover Factoring Agreements

This is the typical factoring agreement where you are required to notify each and every invoice. The facility is priced based on your whole turnover and you can access the cash generated as required. Just because cash is made available does not mean that you have to draw down that money. You only pay the discounting fee on what you draw down. The service fee however is payable on each and every invoice. That does not necessarily mean it is more expensive than other options and I will demonstrate this normally.

Selective Factoring

This is where you choose selected debtors to factor. On that basis you will be expected to notify all the invoices to these debtors to the finance company but not invoices to the debtors not selected. Some clients prefer this as they prefer to just finance the customers that are on longer terms or the larger debtors that can delay payment. Some feel that it is cheaper and we will consider this by way of an example:

Example: Whole Turnover Factoring versus Selective Factoring

Let’s assume ABC Limited have a gross turnover of £1m and a £200,000 outstanding ledger of invoices to their customers. Their 2 largest customers ate X Ltd and Y Ltd and each accounts for £250,000 of turnover per annum and current outstanding balances are £50,000 each.

Whole Turnover Proposal

H Bank have offered a factoring facility with a service fee of 1% and prepayment has been set at 80%.  This means the service fee cost is £10,000 p.a. and the cash made available is £160,000. You only pay interest on what you draw down.

Selective Factoring Proposal

R Bank have offered a selective factoring facility just against customers X Ltd and Y Ltd. Service fee has been set at 2% and prepayment is 80%. This means that the facility service fee will be £10,000 p.a. and the available cash will be £80,000

Explanation

This is a very basic example but we are trying to demonstrate that when calculating a service fee the main variable is turnover. If you halve the turnover the service fee can in effect double. This means that you can still pay the same amount but all you really achieve is less available cash. This is not always the case but it is an important consideration. Only a select few lenders offer selective factoring and as such in your attempt to reduce costs you may actually cost yourself more than is necessary.

Spot Factoring

This is where you factor a single invoice or batch of invoices. You can access the facility on an ad hoc basis. It is ideal for clients that want to access cash on a short term basis now and again. It is however an expensive facility to run if you need cash regularly. In terms of interest rates you are typically paying over 60% APR. That said in terms of costs in pounds and pence when used in the right circumstances it can be the cheapest option for short term cash requirements.

Summary

When considering what type of factoring is best for your business you need to consider several points:

  • How often will you need to access cash? Weekly, monthly, quarterly?
  • How much are you likely to need?
  • Why would you consider excluding certain customers? Is it cost driven?
  • Over and above your anticipated level of borrowing can you envisage a time when more working capital could come in useful?

In the first instance please talk to a member of our team on 0845 251 4040.