Invoice discounting and factoring – what you need to know
This article comes from our interview on Pricing and Getting Paid with Kevin Shakespeare from the Institute of Export & International Trade.
If we go back a number of years factoring was more common but it had a slightly negative connotations with some business and was seen as a last resort measure. The factoring company would buy the invoice from you and then they would arrange for the buyer to pay them not you – they effectively buy debt from you. The factoring company was perhaps less concerned about things like customer service though, which started to damage relationships between the exporter and the buyer.
Some of those negative connotations are gone now because the big banks now own many of the factoring companies and there are many big independent factoring companies around who have developed a business model that has factored in better customer service.
The concept of confidential invoice discounting has increased in popularity, and by confidential we mean undisclosed from the buyer. It’s slightly more expensive to set up and therefore tends to apply for slightly larger sales turnover. You’re more likely to look at invoice discounting for total invoices (your debtor book) worth over 1 million pounds say. Obviously there will be flexibility depending on the invoice financing or discounting company concerned.
Under confidential what happens is that the exporter retains control of the exporter so it’s not the finance company dealing with the buyer but it’s the exporter. It’s done through trust accounts in the name of the bank or the finance company so that its undisclosed to the buyer who thinks they’re still paying the exporter. That element of non-disclosure is preferable for the exporter and allows them to retain control of the relationship.
Generally banks and factoring companies would prefer to lend where there’s a mix of UK and overseas debtors. They wouldn’t just want the debtors in faraway countries; they would want the exporter to also do domestic sales with them. For sales to large organisations overseas where there’s less country risk – i.e the EU – the system can work well.
It tends to be sales to large companies that are financed though because larger companies will generally be more creditworthy and precise on payment terms.
Other articles in this feature:
- Different approaches to pricing to ensure you make a profit
- Ways your bank can help you with getting paid internationally
- Forward rating and how to avoid losing out to currency fluctuations
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