We've just published an article this week on invoice finance and we're collecting members' views.
What's your experience of invoice discounting? Have you or any of your clients used it? If so, how did it work for you?
Please share your experiences below.
Replies (18)
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A mixed bag
The firm I previously worked for discounted on a sliding scale. Payment within 14 days attracted a 10% discount and between 15 and 28 days a 5% reduction. Clients seemed to like it and it certainly improved cash flow.
After I left I tried to implement a similar scheme in my own practice and it bombed massively. The clients hated it! The client base we bought was used to extended credit terms because the previous owner was very wealthy and wasn't at all worried about cash flow. Some clients accused us of just building the discounts into the invoices in the first place!
Monty
Before and after
If you had posted this question two to three years ago it would have elicited a far more positive response!
Too many recent examples of facilities being pulled/restricted, and OTT requirements on securitym, whilst some of the charging structures for new and renewal facilities are pretty shocking. I think this is possibly indicative of a fall off in competition from the ABLs, but there may also be an element of correction in the market.
On the whole though I still feel it is a fine product for growing businesses with solid accounting and credit control systems in place.
JP
last resort only
Normal
false
false
false
MicrosoftInternetExplorer4
Factoring is an excruciatingly expensive form of financing.
5% fees for 30-45 days extra use of cash. is equivalent to rate of interest credit card companies would be ashamed of.
Overdraft is normally a lot cheaper - although I have noticed for the few clients mad enough to use it this tends to get culled by the factoring company.
Sorting out your busines model, billing and cash collection functions are far more profitable exercise than messing about like this.
Moreover the companies banks simply wont let you get out of it. Insisting on 100% of the sales being financed - even if the amount is paid in advance (yes really - read the small print), and refusing exits for blocks of 12 months at a time are all common place.
Factoring is for the desperate only, although of course the banks dont like to call it "factoring" any more.
I can only think of four clients.....
who have used invoice financing in the past 5 years.
Each business is now in liquidation!
Enough said?
Malcolm
It's not easy to set up, and the Bank/ Finance House will want to do an audit.
This will take up a vast amount of your time, especially after the audit when queries are discussed.
I have been there and done it, but there were so many queries concerning personal clients I abandoned the whole thing.
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Malcolm ladd
Invoice Finance
We have used invoice discounting for many years, and have found it to be an excellent source of short -term finance, providing much needed working capital during times when the business is growing. Unlike a normal overdraft the available facility grows as the debtors grow. Credit control has to be managed carefully, but this should happen in any well run business. As for fees, the interest charged on amounts borrowed are comparable with normal overdraft interest. A 'factoring fee' will also be charged, but again a bank will normally charge a facility fee for the provision of an overdraft.
SALES PATTER?
Absolutely not, I am giving you my honest opinion based on my experience as a user of invoice discounting. It may be more expensive than a normal overdraft, but in our case the premium has been worth paying for the added flexibility. I would also add that on-line communication with the lender makes the submission of invoices and drawing down of funds (if needed) very easy. The only additional admin. is a quarterly audit which takes about half a day.
?
comparable to an overdraft rate?
Who do you factor with?
I havent seen anyone iwth less than a 60%+APR by the time ALL the fees are included.
Very important...
Overdraft can be squadered.
ID is specific to billings.
Use of ID leads to automatic funding of working capital and hence the business.It can incease/decrease with billings.
ID leads to fast receipt of cash.
Customers are vetted,so should lead to low bad debt write off.
Very important...
Overdraft can be squadered.
ID is specific to billings.
Use of ID leads to automatic funding of working capital and hence the business.It can incease/decrease with billings.
ID leads to fast receipt of cash.
Customers are vetted,so should lead to low bad debt write off.
Factoring: mixed blessing
My experience of factoring over a range of clients is that it is v expensive. More often than not with the SME's I deal with, the decision to factor is a necessity for cashflow rather than risk of bad debts etc.
Beware the perception of open factoring to customers. Some associate it with cashflow difficulties and avoid trading with such entities.
DISCOUNTING/FACTORING
There is of course a difference between invoice discounting and invoice factoring. My understanding is that discounting allows a company to borrow against invoices raised but the actual credit control remains in-house. It can also be confidential so the customer is unaware that a discounting arrangement is in place. Factoring on the other hand allows the factoring company to take over the credit control procedure,i..e. sending out statements, receiving payment. This may be me more expensive.
My experience with discounting is that the interest on funds advanced is comparable with overdraft rates. However the addition of a fixed discounting or factoring fee can make it expensive.
3% disc if pay inside one week
One of our suppliers offers 3% disc if their invoice is paid within 7 days. If you pay upfront, it would be 4% disc.
That's very interesting in these low-% interest days, and even nice in the past few years; a fast interest gain on a £10k order. We always pay on the day of delivery and leave all the others to the 30day+ schedules. Even if it hurts a little to do it.
So, from the supplier's viewpoint, it gets fast payment and their payment might get through before a squeeze/failure of a company. And the % has been built into their prices anyway, so everyone is happy. They are rather expensive, though.
invoice discounting???!!!
Cheeeeetah - I think you got the wrong end of the stick about this one. Invoice discounting is not the same as offering a customer a discount for promt payment.....
Snowball of headache
Snowball of headache in my opinion, they put rententions on rebate provisions (understood but not what you would think from the bank sales patter you get from all of them) + the bookkeeping and submissions are further admin chg to your business
Depends on client requirements
This really depends on client requirements. I have seen some clients, who by law are required to pay suppliers within a certain time frame, who have used invoice discounting in their early years to expand at an exceptional rate, and without it could not have succeeded. On the other hand I have seen clients 'forced' into this by restrictive bank lending that have not really required such facilities, and been hammered by the charges. So each case must be really considered on it's individual merits. Unfortunately as with most things in life, there is no absolute answer!