Invoice discouting

jack hackett

Anybody know anything about invoice discounting as a means of short term business funding? is it a good method and is it popular? on the flip side, as a business is it a valid business model? is there much scope for it in this country?
I see some companies offering this now in newspaper ads etc.

Nuttzz

You need to be big on credit control with this, as the longer it take to get paid the more pressure you find yourself in from the discounter.

A number of people I have talked to over the years had found it very hard to get off the invoice discount treadmill once they were on it so I'm not sure it would be very usable in the short term.

jack hackett

Nuttzz wrote: »

You need to be big on credit control with this, as the longer it take to get paid the more pressure you find yourself in from the discounter.

A number of people I have talked to over the years had found it very hard to get off the invoice discount treadmill once they were on it so I'm not sure it would be very usable in the short term.

So it seems that once the discounter gets you on board its difficult to get off?

So it seems there is a big demand for this sort of service?

Graham

jack hackett wrote: »

So it seems that once the discounter gets you on board its difficult to get off?

So it seems there is a big demand for this sort of service?

I'm not sure I'd say there's big demand for it.

It's generally an expensive way to finance a business, I'd certainly recommend most businesses avoid it.

It used to have a bit of a stigma attached to it, last resort financing type of thing. I'm not sure if that's still the case.

jack hackett

Graham wrote: »

I'm not sure I'd say there's big demand for it.

It's generally an expensive way to finance a business, I'd certainly recommend most businesses avoid it.

It used to have a bit of a stigma attached to it, last resort financing type of thing. I'm not sure if that's still the case.

Thanks, although it could be easier than using the banks

mrawkward

Much cheaper than overdraft. Requires proper cash flow /debtor managment skills but can facilitate the cash needed to fund seasonally driven businesses very well and those with low fixed assets. Only suited to companies extending B2B credit terms. Posts so far clearly indicate a lack of any real experience on the topic.

jack hackett

mrawkward wrote: »

Much cheaper than overdraft. Requires proper cash flow /debtor managment skills but can facilitate the cash needed to fund seasonally driven businesses very well and those with low fixed assets. Only suited to companies extending B2B credit terms. Posts so far clearly indicate a lack of any real experience on the topic.

Hi thanks for your response, i take it you have used this type of short term funding previously? did you find it good? do you know if there are many companies offering this in the irish market? are there many companies using it?

mrawkward

It is not a short term funding mechanism but rather a working capital/cashflow solution. It does involve secured charges and anti-fraud personal undertakings. The rates are low but fees can make it unattractive on smaller facility amounts. It is now very much mainstream with all the major banks offering the product under the heading Commercial Finance. There is a huge amount of information available with simple Google searches, you do not appear to have done this from your posts.

jack hackett

mrawkward wrote: »

It is not a short term funding mechanism but rather a working capital/cashflow solution. It does involve secured charges and anti-fraud personal undertakings. The rates are low but fees can make it unattractive on smaller facility amounts. It is now very much mainstream with all the major banks offering the product under the heading Commercial Finance. There is a huge amount of information available with simple Google searches, you do not appear to have done this from your posts.

Thanks, no i am only looking into this now, so the banks offer it under the guise of commercial finance! i see there are other companies offering it too, presumably they would be more efficient than the banks

368100

mrawkward wrote: »

Much cheaper than overdraft. Requires proper cash flow /debtor managment skills but can facilitate the cash needed to fund seasonally driven businesses very well and those with low fixed assets. Only suited to companies extending B2B credit terms. Posts so far clearly indicate a lack of any real experience on the topic.

Agreed with this. Invoice discounters will need to see a good diverse spread of debtors on a B2B basis and the debtors book will need to be clean with limited bad debts. Startup costs of a few grand should be expected as an auditor carries out a debtors book survey and a legal charge is taken over the debtors book.

In my experience ID line interest would be approx half of that of a standard business overdraft.

Its not a facility to set up if you only rarely need to finance working capital, as every invoice needs to be routed through the facility, you cant pick and choose which you want to and all payments are made to the Invoice discounter's bank account which you normally need to show a disclaimer on your invoices for so you might want to consider this. Invoices are normally finanaced up to approx 75% of the debtors book and within a hard limit.

Have seen ID used as part of a deal to finance capital expenditure but id be wary of doing this.

jack hackett

368100 wrote: »

Agreed with this. Invoice discounters will need to see a good diverse spread of debtors on a B2B basis and the debtors book will need to be clean with limited bad debts. Startup costs of a few grand should be expected as an auditor carries out a debtors book survey and a legal charge is taken over the debtors book.

In my experience ID line interest would be approx half of that of a standard business overdraft.

Its not a facility to set up if you only rarely need to finance working capital, as every invoice needs to be routed through the facility, you cant pick and choose which you want to and all payments are made to the Invoice discounter's bank account which you normally need to show a disclaimer on your invoices for so you might want to consider this. Invoices are normally finanaced up to approx 75% of the debtors book and within a hard limit.

Have seen ID used as part of a deal to finance capital expenditure but id be wary of doing this.

thanks for the comprehensive outline, wow used to finance capital expenditure, very risky i would imagine?
so ID is really a more cost effective substitute for an overdraft facility and really is used as an ongoing cashflow alleviation

Seve OB

Yes I am very familiar with it, been using it through BOI for 15+ years.

It is cheap finance but it is also a large expense in our accounts each year. It would be nice if we didn't have to use it, but the nature of your business will determine if you will use it short, medium or long term. In the taxi business, we invoice our corporate clients either weekly, fortnightly or monthly. They will pay us whenever, some obviously quicker than others. On the flip side, we have to keep the driver happy and pay them promptly or they will not stay with us, so it really is an absolute necessity for us. Now we manage our own debts, I know some companies who offer the service will also do the chasing of debts etc so I can only comment on the way I understand it.

There is a fixed monthly fee, I guess this will depend on your level of business. On top of that, you will pay interest based on your level of borrowing. Any debts over a certain peiod are disallowed and possibly some other restrictions. Terms I'm sure will differ for everyone. It is all done online now, we tell the bank each week how much our total sales are and they will allow % credit of this amount. We have a current account with a limit so even if our sales would allow us more borrowings, we are restricted based on the current account overdraft limit. The total sales each week do not really matter as it actually based on your total book value. We reconcile our debtors every month and send the rec to BOI. BOI will do spot checks and request a breakdown of sales amounts from time to time. BOI come in to us twice a year to audit our systems. BOI website is dire and really belongs in the dark ages, worst banking website I have ever seen by a million miles.

Here is an simple example (not the rates we have).

Lets say you have a deal where you get 50% of your book allowed with a current account limit of €65k.

Book value of debtors is €150k aged out as current-90 days €120k, older €30k. Well you will be allowed 50% of €120k, thats €60k which you can borrow. Your current account limit is €65k, so you can borrow it all.

Tomorrow you post total sales of €20k. Book is now €170k, less €30k older giving you an availiility of (50% of €140k) €70k which you have available to borrow. But your current account limit is €65k so even though your book is higher, you are restricted on the total amount you can borrow.

jack hackett

Seve OB wrote: »

Yes I am very familiar with it, been using it through BOI for 15+ years.

It is cheap finance but it is also a large expense in our accounts each year. It would be nice if we didn't have to use it, but the nature of your business will determine if you will use it short, medium or long term. In the taxi business, we invoice our corporate clients either weekly, fortnightly or monthly. They will pay us whenever, some obviously quicker than others. On the flip side, we have to keep the driver happy and pay them promptly or they will not stay with us, so it really is an absolute necessity for us. Now we manage our own debts, I know some companies who offer the service will also do the chasing of debts etc so I can only comment on the way I understand it.

There is a fixed monthly fee, I guess this will depend on your level of business. On top of that, you will pay interest based on your level of borrowing. Any debts over a certain peiod are disallowed and possibly some other restrictions. Terms I'm sure will differ for everyone. It is all done online now, we tell the bank each week how much our total sales are and they will allow % credit of this amount. We have a current account with a limit so even if our sales would allow us more borrowings, we are restricted based on the current account overdraft limit. The total sales each week do not really matter as it actually based on your total book value. We reconcile our debtors every month and send the rec to BOI. BOI will do spot checks and request a breakdown of sales amounts from time to time. BOI come in to us twice a year to audit our systems. BOI website is dire and really belongs in the dark ages, worst banking website I have ever seen by a million miles.

Here is an simple example (not the rates we have).

Lets say you have a deal where you get 50% of your book allowed with a current account limit of €65k.

Book value of debtors is €150k aged out as current-90 days €120k, older €30k. Well you will be allowed 50% of €120k, thats €60k which you can borrow. Your current account limit is €65k, so you can borrow it all.

Tomorrow you post total sales of €20k. Book is now €170k, less €30k older giving you an availiility of (50% of €140k) €70k which you have available to borrow. But your current account limit is €65k so even though your book is higher, you are restricted on the total amount you can borrow.

Thanks for sharing this, would you say if you went with a non bank company offering this you might be able to borrow more as they couldnt restrict you by the current account?
seems like a good option and appears to have worked well for you?

368100

jack hackett wrote: »

thanks for the comprehensive outline, wow used to finance capital expenditure, very risky i would imagine?
so ID is really a more cost effective substitute for an overdraft facility and really is used as an ongoing cashflow alleviation

Its risky in the event of an increase in bad debts as with everything, wouldnt leave you much capacity to absorb them and Invoice discounter could tighten terms of finance which would compound the problem.

Yes it should be more cost effective than a standard business overdraft in main banks, some of their legacy rates may be as competitive but new business overdrafts are generally much higher rates. Obviously the most cost effective way to finance working capital is from your own profit/cashflow but if your business growth is above the level for existing cashflow to service that growth then ID is one of the most appropriate ways to finance this.

Btw.....please dont take this as formal financial advice, you need to talk to someone who has full oversight of your business in order to advise you properly.

Seve OB

I should of added that the current account is a seperate account which all our debtor receipts have to be paid into. This is not our current account, it belongs to the bank and we have no control over it, ie to write cheques or make payments from. We drawdown an amount from that account based on availability to our main day to day current account.

jack hackett wrote: »

Thanks for sharing this, would you say if you went with a non bank company offering this you might be able to borrow more as they couldnt restrict you by the current account?
seems like a good option and appears to have worked well for you?

I really have no idea, can only comment on BOI as my knowledge of other companies is limited but I doubt you would be allowed any more from a non banking entity and my guess is you will get more from banks.

Yes it works well for us, but as I outlined, we use it to fund our working capital. I would never recomend it to finance asset purchase, get a lease or loan for that kind of thing.

368100

jack hackett wrote: »

Thanks for sharing this, would you say if you went with a non bank company offering this you might be able to borrow more as they couldnt restrict you by the current account?
seems like a good option and appears to have worked well for you?

Non bank IDs may give you slightly better prepayment terms but they still use their own accounts to collect funds, same as bank IDs. I would be very careful reviewing terms and conditions though as they are often harsher and have quicker rights to instruct a receiver. Invoice discounting isnt covered under the SME lending code so as a customer you have less consumer protection than say getting into difficulty on an overdraft or loan.

pedroeibar1

There is an important issue that has not been raised – recourse.
ID can be recourse or non-recourse. Non-recourse will include bad debt protection, usually provided by a credit insurer. When this is in place the amounts advanced are to the level of the insured amount – usually about 85-90%. Invoices will only be purchased by the discounter within agreed credit limits for each customer.
I’d second what Mr. Awkward said earlier, ID now is mainstream, the rate often is cheap, but keep on open eye for the ancillary charges. Another possible method is to take out your own credit insurance policy and assign the benefits to the bank as security for an overdraft.

Seve OB

pedroeibar1 wrote: »

There is an important issue that has not been raised – recourse.
ID can be recourse or non-recourse. Non-recourse will include bad debt protection, usually provided by a credit insurer. When this is in place the amounts advanced are to the level of the insured amount – usually about 85-90%. Invoices will only be purchased by the discounter within agreed credit limits for each customer.
I’d second what Mr. Awkward said earlier, ID now is mainstream, the rate often is cheap, but keep on open eye for the ancillary charges. Another possible method is to take out your own credit insurance policy and assign the benefits to the bank as security for an overdraft.

I think you are mixing things up. Invoice discounting is based on book value. If you write off bad debts, your book value goes down so amounts available to you are reduced accordingly. Recourse doesn't come into it.

I think you are confusing it with factoring where you basically sell your invoices to an agent.

368100

Seve OB wrote: »

I think you are mixing things up. Invoice discounting is based on book value. If you write off bad debts, your book value goes down so amounts available to you are reduced accordingly. Recourse doesn't come into it.

I think you are confusing it with factoring where you basically sell your invoices to an agent.

Agreed. Factoring is what is being described there. Ive never seen bad debt insurance used in invoice discounting.

pedroeibar1

Seve OB wrote: »

I think you are mixing things up. Invoice discounting is based on book value. If you write off bad debts, your book value goes down so amounts available to you are reduced accordingly. Recourse doesn't come into it.

I think you are confusing it with factoring where you basically sell your invoices to an agent.

You are quite right, I expressed myself carelessly. Recourse depends on the agreement between the financier and supplier. How the system operates depends on the size of the ‘borrower’, the smaller ones being subject to stricter terms. Every unpaid invoice is taken from the facility limit at an agreed past-due date (not when written off) so it reduces the cash available. It also scares the pants off the financial institution as to the value of the security and credit control procedures in place. That is why credit insurance often lurks in the background and can, if used properly, provide a degree of support to any agreement and be the basis for an alternative means of finance.

pedroeibar1

368100 wrote: »

Ive never seen bad debt insurance used in invoice discounting.

Not correct.:)

Obvious Otter

Certainly it’s an option for some companies with cash flow problems. I’ve seen some companies m manage it very well and others not so much. You have to manage debtors much more stringently but it’s often cheaper than an overdraft and easier to obtain as has been mentioned.

368100

pedroeibar1 wrote: »

Not correct.:)

So I have seen it have I? Weird...... Could you remind me of date and time please?

If I need corrected on what other things i havent seen ill be in touch...cheers!

pedroeibar1

368100 wrote: »

So I have seen it have I? Weird...... Could you remind me of date and time please?

If I need corrected on what other things i havent seen ill be in touch...cheers!

Childish response. If you got out more you would see how the credit insurers, invoice discounters and factors all work together and also compete in those sectors.

You might also discover that Atradius, Coface and Euler (the ‘top 3’ credit insurers worldwide) each have trade finance arms that provide supply chain financing, factoring and invoice discounting for their clients, among whom are several invoice discounters and factors. Try Google.

368100

pedroeibar1 wrote: »

Childish response. If you got out more you would see how the credit insurers, invoice discounters and factors all work together and also compete in those sectors.

You might also discover that Atradius, Coface and Euler (the ‘top 3’ credit insurers worldwide) each have trade finance arms that provide supply chain financing, factoring and invoice discounting for their clients, among whom are several invoice discounters and factors. Try Google.

Perhaps try put some effort into phrasing your posts correctly to avoid pesky childish responses. We can all google....