In this world, being given options can either be a treat or a challenge. For the former, this allows us to dabble into alternatives. We get to take a look at the potential of each one and this enables us to adapt and to incorporate the best possible choice for our needs. As for the latter, it can be taxing in the sense that they can be overwhelming. It’s not uncommon for people to be confused when presented with various ways of doing things. Single Invoice Finance is no different.
This strategic process of raising financial resources against individual invoices has more categories under its umbrella. For us, it is important to carefully understand what each one presents so that we can decide and assess if they’re the perfect fit.
Factoring – In this method, the right to collect against the invoice is sold to the provider, called a factor. In other words, the responsibility and burden of collection is passed on to and assumed by the factor. The amount received as an advance will only be around 80-95% of the total invoice value with the remainder held by the factor until complete collection is achieved. Once done, it shall then forward the remaining value less fees to the company.
Discounting – Here, the responsibility of collection is retained by the business. The invoice is used as a form of security in exchange for the advance. After maturity and once collection is completed, the company shall then repay the provider for the cash advanced plus fees.
Confidential – Specifically applied in a factoring arrangement, some entities choose to make the transaction confidential. This leaves the customer to whom the invoice is attached to out of the picture so as to avoid confusion when collection period rolls in.
Disclosed – The complete opposite of a confidential agreement, this fully discloses the use of the invoice to generate additional cash for the business entity.
Funding Limits – Also known as with recourse financing, this alternative stipulates that in the event that the financing institution cannot collect against the invoice due to the owing customer’s non-compliance, the company is required to buy the invoice back.
Without Recourse – This single invoice finance option strips away the risk of nonpayment for the company. Should the owing customer fail to completely pay on time or at all, the loss shall be absorbed by the financial provider.
When it comes to receivables financing, two options reign supreme: single invoice discounting and factoring. However, the two often get mixed up and mistaken for the other. Today, we look deeper and try to differentiate the two.
Single Invoice Discounting
The method involves the use of a specific customer invoice as a security or form of collateral in exchange for an advanced received which is equivalent to its value. The company gets to use the cash immediately before its actual maturity. Once it has matured and collection from customer is completed, it must then comply with its responsibility towards the financial provider by repaying it of the sum advanced plus fees.
Single Invoice Factoring
The method involves the sale of the rights to collect against a specific customer invoice in exchange for an advance of its value. Such advance is equivalent to at least 80% of its total value and is received immediately. The company goes on to use the fund received. The burden of collection is also passed on to the financial provider. Upon maturity and once full collection is received, the provider forwards the remaining balance less the fees to the company.
In terms of benefits, the two pretty much produces the same perks as follows:
Both are not a liability. – Both discounting and factoring are not a debt, a loan or a form thereof. They are both asset transactions so they also do not come with interests. The fee is set beforehand and does not compound.
They hasten collection. – Most providers are able to release cash within a day’s time. The advance also paves the way for immediate cash recognition as companies no longer have to wait for maturity in order to use the funds attributed to the invoice.
They are a onetime transaction. – Only a single or selected invoice is used in both methods. The choice of which invoice and when to use it shall be completely under the discretion of the company. It does not involve lengthy contracts as well.
They inject cash into the system. – Its immediacy allows for a quick injection into the cash flow which helps in terms of liquidity and ins strengthening the working capital of the business entity.
We hope we cleared the confusion between single invoice discounting and factoring. So, which of the two are you going for?
Export funding has become a very important and effective tool that has allowed companies to trade overseas without the usual hefty complications, one of which being the financial risks.
Admit it. We all hate risks and we’d do everything in our power to avoid them. The thing is, exporting and diving into the international market is tough business. It’s not for the weak and it demands so much that it may appear extremely taxing. However, businesses know that when done right it can lead to endless opportunities, expansion and growth that is simply hard to ignore.
Now, what are the types of financial risks that export funding helps shun away? Let us all find out by reading the following list.
1. Credit Risk – Investopedia defines it as “the risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation.” In other words, it occurs when the buyer or importer misses or fails to pay up. Delays are by itself already numbing. Absence on the other hand screams nightmare. 2. Currency Risk – This arises from the change in price of one currency against another. Trading overseas mean that one will sell goods and receive the payments thereto via the local currency of the exporter. Over time, these fluctuations can create losses especially when certain economies abruptly surge up or down. 3. Liquidity Risk – This is the risk that the entity could no longer meet its short term obligations, often due to the inability to convert a security or hard asset to cash without a loss of capital and/or income in the process. Importers are known to defer payment up until goods have been delivered or until they have been resold. This can create a liquidity issue for the exporting company as its cash will be locked up in their invoices. When this grows to a certain degree, it will put a strain on the cash levels and thus affect liquidity. Export funding helps remove this by allowing companies to advance the value of such invoices even before actual payment is administered.
By minimizing or even eliminating credit, currency and liquidity risks, export funding allows companies to better maximize the benefits of the trade. This reduces if not removes the fear of having to face these threats that could in a way hurt the business to a crippling degree.
In the world of invoice financing, many people find discounting and factoring confusing. Others say that they are one and the same while there are those that insist their huge difference. If you find yourself in the same state of bewilderment then you are in luck as Working Capital Partners is here to clarify the matter for us.
First things first, let us define what invoice financing is all about. As per definition, it is a type of short term borrowing that allows a business to draw cash against its customer sales invoices before the said customer has turned in their payment. In many cases it is used to improve a company’s working capital and cash flow, provide for emergency expenditures and to hasten collections.
What makes it different for regular forms of borrowing is the fact that it does not require collateral in the form of fixed corporate assets. It can also be processed in a matter of days or even in as fast as twenty four hours. Moreover, it does not appear as a liability in the financial statements but rather a decrease in receivables and an increase in cash. It also frees up the amounts locked in within the invoices relatively earlier than when it should have been, that is at the date of customer payment.
To answer your dilemma about factoring and discounting, the two are alike in two areas. First, both create and bring up the same benefits and advantages. This includes an improved cash flow, available resources, hastened receivable to cash turnover and lesser bad debts to name a few. Second, they both provide for an advance of the value of the invoice/s subjected to them. As for their differences, read on below.
In factoring, the company brings their receivables to the financial provider who in turn provides for the advance which is an equivalent of eighty percent or higher of the invoice’s value. The same provider carries on the task of payment collection from the customers. Once that has been achieved in full, the remaining percent less fees will be forwarded to the company.
On the other hand, discounting still provides for the same advance however the responsibility regarding collection remains with the company. Once collection has been completed, the company then comes back to the financial provider to repay them plus the fees.
Hopefully, the Working Capital Partners have helped clarify things for you after reading through this article.
Selective invoice factoring, also referred to as spot, is a type to receivables financing where businesses get to advance a major percentage of the value of their sales invoice from a third party financing agent. It comes alongside other business financing types such as loans, equity financing, asset based lending, purchase order finance and merchant cash advance. What separates single invoice factoring is its characteristic where it allows companies to raise capital without any debt involved. Plus, it is to be noted that only one invoice of your choice will be subjected whenever you want to. Now you wonder. Who uses it then?
UP AND COMING BUSINESSES: Most businesses in every industry that has recently started or are still building on their organization often find a hard time raising their needed funds during their first years. The reason is because they have not acquired as much assets yet which are requisite collateral for banks and other lenders. As an option, they are given the chance to do so but instead of borrowing they sell their invoices instead thereby hastening the recognition of cash which they may use to pay suppliers etcetera.
THOSE IN NEED OF CASH: There are a lot of established companies who despite of outstanding sales do not have enough cash. How come? Customers do not always pay in cash. In some instances, they pay on credit therefore cash is locked up. Selective invoice factoring is a good answer to this dilemma.
ENTITIES WITH LONG RECEIVABLES: To hasten up a certain receivable which could be large in amount and whose value can provide for a present need, companies who have long receivables make use of it too.
THOSE WHO WANT TO AVOID DEBT: Not all receivables are paid on time. Others do not even get paid at all and thus bad debts. These are inevitable and cannot be avoided unless you do not offer credit. By using a nonrecourse type of factor, you shift such risks and losses to the financing agent.
COMPANIES WITH EMERGENCY EXPENDITURES: Lastly, selective invoice factoring can also be used by companies who have urgent expenses. These can be anything from buying new equipment, repair of a major machinery used for production, cash shortage to provide for employee salaries and wages and practically any other operating expenditure. You never know when you have to disburse an amount vital for the continuation of operations.
Factoring is known to provide an answer to companies who have slow paying customers and those who need a boost in their working capital. Others even see it as a means to protect themselves against noncollectable accounts and losses from bad debts. At present there are notable UK factoring companies like workingcapitalpartners.co.uk who provide their services to the market. They offer many different services and types of factoring. These variations occur as different companies may provide for different rates, terms and conditions. Rest assured these are always communicated to their clients as transparency is one thing that keeps this business growing.
First and foremost let us describe the process. The owner of the receivables or invoice sells these to a factor who in turn gives a percentage of the value in advance. The factor will chase after and collect the payments from the customers and once the whole amount has been fully collected, the balance left of the invoice’s value will then be given by the factor to the seller. This will then be less any fees or commission which both parties have agreed upon. So what services do these UK factoring companies offer? Here’s a little info for all of you.
For one, there is this thing we call Recourse. Here credit protection is not part of the agreement. In here you are responsible for buying back the invoices which have not been paid by your customers within the agreed upon period. Even if the factor has purchased the invoices from you and given you a percentage in advance of their values, you assume the risk of uncollectability. Fear not though as factors help you out to avoid having these buy backs. As part of their services they will check up on your accounts and customers to see their ability to pay. Also they can take care of managing your receivables alongside your own in house team.
If however you do not want to assume any risk of uncollected amounts you may opt for Non Recourse. They will completely assume the risk and thus relieve you from any bad debts.
There is also what we call the Modified Recourse where the factor carries receivable insurance for amounts uncollected due to inability to pay for financial reason. For other causes other than that the company must buy back the invoices.
In the event that you don’t want to subject all your receivables to a factor but would prefer a one time transaction, UK factoring companies may provide you with spot or selective factoring. This will allow you to choose which receivable to use and when to use it.