With the new tax year underway and businesses still reviewing budgets and exploring new funding options, Touch Financial have some guidance to keep in mind in preparation for 2017.
What Financing Do You Really Need?
Before deciding which type of finance product will be the most appropriate for your business, draw up a good outline of your borrowing requirements, business history and what your overall expectations will be once your funding is secured.
For borrowing requests, it is worthwhile thinking about the following:
- Why do I want to borrow?
- What amount would I like to borrow?
- How long would I like to borrow the amount for?
- How do I plan to repay?
- What assets do I require for security?
- Am I eligible for Invoice Finance?
To be eligible for invoice finance, the volume and value of your invoices will be important considerations along with the nature and performance of the business and its debtors. Particular sectors and industries generate debt in different ways with some debts being highly contractual and others relatively simple meaning less barriers to potential lenders.
Therefore you should expect funding provision to vary in accordance with this. It is important to know that an invoice finance agreement will not guarantee finance provision against every invoice raised, but agreeing an advance can definitely allow you to react and unlock working capital to fulfil growth opportunities.
Once your requirements are identified, you will enter into a contract with the funder usually on a fixed continuous basis or transactional basis with defined notice periods (i.e. – whole turnover or selective/ single invoice finance facility options).
Note, depending on the client’s circumstances, no security other than the invoice is required to secure the funding advance. In some instances, a debenture or director personal guarantee may be needed. Expect the finance lender to help you identify and explain this to you.
How Much Funding Will I Be Able To Receive?
In line with a policy guidance paper prepared by the ABFA, the two significant and common core parameters that determine the amount of funding available within an invoice finance facility are the facility limit and prepayment percentage.
- Facility Limit – also known as the ‘Finance’ limit, this is usually determined by both a qualitative and quantitative assessment of the quality of the client’s debtors. It can be seen as the equivalent of a bank overdraft limit and is the maximum amount of funding that will be provided under a facility. The better quality and less risky your debt is, the less likely you are to be restricted by this.
- Prepayment Percentage – also referred to as ‘Advance Rate’, ‘Advance Percentage’ or ‘Initial Payment Rate/Percentage’, this is the proportion of the value of eligible invoices a lender will provide an advance for. The nature of your business and its circumstance such as your credit history which will be a factor to what agreement is reached. At a minimum the pre-pay average is typically 80% across most industries but can increase or decrease dynamically real-time as invoices are raised and paid.
To optimise your invoice finance facility and instantly assess the factoring rates you could expect to receive from a lender, feel free to use Touch Financial’s invoice finance calculator.
Different Service Levels to Consider
- Contract Period and Tie-ins – once you have selected the invoice product you feel is suitable, know that the contract period you can secure could vary from lender to lender. Some will offer fixed-term trial periods or short-term rolling contracts for six months providing you with the flexibility or assurance that invoice finance is right for you. You do not have to be tied into a long term contract if you do not feel comfortable in doing so.
- Additional Charges and Services – in addition to the common arrangement fees, if you are a small company seeking regular working capital injections you may want to avoid additional charges which could apply with each advance release. Likewise, extra service features could be available to you such as online methods or platforms if you would prefer to be able to keep a track of and manage your facility on a daily basis. It’s advisable to keep in mind that certain lenders will take into account your business objectives and industry factors to a greater extent than others.
- Reputation – in the past decade invoice finance has grown in provision and popularity and in turn invoice finance funders have become more sophisticated with their services and what facilities they can offer. Some financiers have built up specialist knowledge in certain industries such as construction or recruitment and can even offer complimentary solutions relating to Trade Finance or Asset Finance.
Get a Free Consultation
You may feel comfortable in choosing your preferred lender, but know that free, independent and confidential consultations are available to you if you are seeking an alternative and informed viewpoint. For an effective consultation, have all of your top line business information and facts ready with an expectation to discuss your business profile, performance record, sales ledger and assets. The more transparent you are about your business, the more accurately a prospective lender will be matched with your business to fulfil borrowing requirements with the most suitable invoice finance option for your business. Specialist invoice finance consultants are at hand for you to ask all of the questions you need and to be introduced to the most appropriate invoice finance lender.