'Selective Invoice' or 'Spot' Factoring

[Hobo]

Never been involved with invoice discounting/factoring at all previously as my main works are construction related and as such have tended to be on 'application' basis, not 'invoice'.

We have however more recently set up a pure 'supply only' side to the business which would indeed work on an invoice basis, and am interested at factoring/discounting these invoices as would assist cashflow of the company, and allow more works of the same kind to be undertaken (as are generally high labour content, meaning office/workshop being open all hours, and the associated overtime costs associated with this).

As an example, we have a project awarded to build certain items at the rough value of 50k. This work will commence the 2nd week in March & take 3 weeks roughly, so be complete by the end of March. It will however be broken down into 2 or 3 invoices, so say 25k mid March, and the 25k balance at the end of March. Our client would ideally want to pay 60 days from end of month, however 45 would be achievable I suspect.

Does anyone have any knowledge of this service, the pro's/con's of it, and also rough idea of fee's involved ? The work is on a good margin, so assuming the fees aren't ridiculously high, then its something I wish to look into further.

[MinesGT]

It can have its advantages, but be very wary......

1. If the release of cash (up to 90% of invoice value) can be used to generate more profit, then its a good starting point.

2. If its purely just for cashflow, then as a fresh (or relatively fresh) start up, again, its a good starting point, providing the cost of the service still allows retainable profits.

3. It also can give you the confidence to take on work/contracts knowing that the finance for this is essentially in place.

4. As for the actual cash flow, it is "front end" loaded, is any change in turnover has an immediate effect. This is ok in an expanding business, but if you start to experience a downward trend, then this can reduce anticipated funding very quicky....beware !!

5. Costs can vary wildly, so it pays to shop around for pricing. Costs are built around a minimum service charge, a percentage of invoices factored, re factoring fees (again a percentage), plus, in some cases same day draw down payments etc. As an idea, costs for a £1.4m turnover can be from £25k pa to whatever they can get a way with!

6. If an invoice goes beyond the agreed timescales (ie over 90 days), then they can disapprove funding on that invoice, which in effect, takes this out of available funds, and they charge you for the priveledge...

7. If one of your customers has its credit rating reduced, then they can reduce the available funds generated by that customer, and in some cases, refuse to fund any invoices for that customer.

8. Contract terms are usually minimum of 12 months, with 3 months notice ( a long time if the provider is useless..)

I am using the services of one company now, and has been beneficial, however, I have also lost a company through this.

Hope this helps

[Hobo]

Thanks. My query was however about selective factoring (ie I choose which invoices to factor, whether that be one per year or every one). I understand the fees on this service to be more expensive but have not managed to get any fixed details. I'm sure I read somewhere they are generally between 2-8% of invoice value.