Invoice Finance – An Illusion of Simplicity

Invoice Finance is a complicated lending product – more so than many people realise… …this presentation seeks to demonstrate this by looking at some of the key components of invoice finance products TODAY’S PRESENTATION Scope and content

Arrange finance for businesses Ongoing support for borrowers: Assistance with their facility renewals Advice on banking arrangements and relationship Services for non-borrowers Support for borrowers in difficulties with their bank ABOUT IBC What we do

Put simply you sell your invoices to a financial institution So instead of waiting 30, 60 or even 90 days to be paid you can have the bulk of the cash now today INVOICE FINANCE What is invoice finance

– When banks lend money they have to put aside an amount of their own cash to cover the risk of you defaulting this is their “capital” – Banks don’t like overdrafts – Overdrafts are very efficient for borrowers but they are a very inefficient use of the banks precious capital INVOICE FINANCE Why lenders prefer invoice finance

– “What could be simpler” says the bank salesman – “raise your invoice today for £1000 and I will give you £850 straight away, you can have the other £150 less my charges when the invoice is paid – The reality is there are loads of moving parts and lots of ways for invoice finance to trip up the unwary INVOICE FINANCE Why its not a simple product

Confidential Invoice Discounting Chocs Full service factoring Single invoice INVOICE FINANCE THE TYPE OF FACILITY

SERVICE CHARGE Levied on sales including VAT % of sales, fixed fee, variable on monthly usage Annual minimum charge (basis of charging varies) DISCOUNT MARGIN Payable on funds in use Care re lender’s base lending rate (and minimum rates) INVOICE FINANCE The Cost

ARRANGEMENT FEE Take on fees Security fees Audit charges Overpayments Refactoring charges Annual renewal fees Same day payments ‘Bank’ charges INVOICE FINANCE OTHER COSTS…

ADVANCE RATE Think of as a headline rate – dilutions can be high FACILITY LIMIT Consider level of sales, payment terms, advance rate INVOICE FINANCE Key areas to consider or why sometime the promises don’t live up to reality

RECOURSE PERIOD Funding period on invoices Needs to fit with trading terms and customer payment history MINIMUM LENDING TERM Varies widely – 1 month to 2 years! Breakage costs NOTICE PERIOD INVOICE FINANCE Key areas to consider or why sometime the promises don’t live up to reality

CREDIT LIMITS Depends on customer (debtor) credit rating Different credit agencies = different credit ratings CREDIT INSURANCE Cover for bad debts (can be bought separately) DEBTOR CONCENTRATION LIMITS Restricts exposure to any single debtor Breach will normally affect cash flow INVOICE FINANCE Key areas to consider or why sometime the promises don’t live up to reality

DEBT TURN RESTRICTION Limits age profile of the overall sales ledger Advance rate reduced if limit is exceeded CREDIT NOTE RESTRICTION Limit on value of credit notes per annum Lender may reduce advance rate if breached INVOICE FINANCE Key areas to consider or why sometime the promises don’t live up to reality

DIRECTORS’ GUARANTEES DIRECTORS’ INDEMNITIES Restricted and unrestricted BEWARE SALES TACTICS ! OTHER COSTS… INVOICE FINANCE Key areas to consider

When invoice finance works best When it won’t work at all… INVOICE FINANCE Key areas to consider

Ian Priest