invoice discounting

F

flogit

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we are a growing wholesale company requiring extra working capital. Our bank has suggested invoice discounting as a means of increasing working capital. What are the pros and cons of invoice discounting and what are the areas we need to concentrate on in negotiations with the bank.
 
The major pro is you gt access to more funds, and the funds avialable should grow in line with your business.
Con is that you give up your debtors as security and the criteria for the bank accepting them can be quite limited.
The key area you should concentrate on is price - you are providing security (possibly quite substantial security) to the bank so you should be seeing a corresponding reduction in the cost of finance.
My belief is that invoice discounting can be very expensive to the customer relative to the risk banks take on. If your debtor book is of reasonable quality you should be looking for interest rates that reflect this. As a comparison you should be looking for a rate that is more in line with a residential mortgage than a personal loan.
Also take into account the increased admin. involved before you decide and price an overdraft or a simple term loan for comparisson. Banks will always look for extra security first on a loan they would provide anyway so there should be room for negotiation.
 
You should also take into account visibility to your customers - Will they see anything on your invoice which will make it clear to them that you are using invoice discounting?
 
Whilst it is great from a cash flow point of view, it is hugely expensive and once you go down that road it is very difficult to go back...in my opinion it is a last resort.
 
I agree with Baz,

It is very expensive. And unless you have a large cash resource at some point in the future it will be hard to get out of too.

Perhaps you could approach you bank about increasing your overdraft if you are having minor cashflow problems at certain times of the year?

at work we use BIF discounting and although at certain times it is invaluable, we are more or less stuck with it for the short to medium term as it is very difficult to work within its guidelines and develop independently. It costs us about 20-25k pa to run.

Shop around and read up on your banks system and make sure interest rates etc are competitive.
 
re invoice discounting

how expensive is it. Are we talking about the bank charging large fees plus interest. We would be discounting about 100k of our invoices and drawing down about 80k. Our debtors average about 60 days .Can a rough figure be put on it.
 
Hi Flogit,

I can give what the company I work for is paying for the privilege.

for every invoice submitted we are charged .15% plus vat of the gross value, minimum of €375 ex vat a mth.

On top of that we are charged interest (called Discount) on the amount drawn down (in effect an overdraft) this is charged daily on the end of day amount drawn down off the top of my head I cannot think of the rate but last mth (feb) we where charged €1036.12 for the month. (average overdraft for the mth 108k). Average debtors €200k.

PLus we were charged up to recently a transfer charge if we wanted to transfer funds to our current account, 6.50ex vat a transfer, now we transfer for free!!

Hope this helps?
 
Thank you everybody you have strengthened our hand, for our negotiations with the bank. At least we now know what to look for.
Flogit
 
Hi Flogit

Sorry, this post may be too late for your benifit, but may help others to follow nonetheless :)

If your looking at Invoice Discounting, confirm that it is "confidential" (i.e. that none of your customers are told your using it).

You can expect most Banks to offer the service, Ulster Bank, Bank of Scotland, Bank of Ireland all have a Commercial Finance / Invoice Discounting Unit. Compare their prices before you sign up ! While you will also see advertisments for the likes of Celtic Invoice Discounting & Clancy Invoice Discounting in the newspapers, ensure your clear on their costs, before you proceed with them ... I've heard some very expensive quotes mentioned, for both of these.

Generally, you can expect the charges to be in the region of 5.75% plus an annual Administration Charge of approx €5k pa. Some of the Bank's are more clear in how they present their charges, than others - so watch out for other less obvious costs such as: Transfer fees, FX charges if your discounting invoices in non-Euro currencies, base rates / prime rates rather than ECB or Euribor as their cost of funds etc

I would fear that given your only going to be discounting in the region of €80k - €100k then your cost of funds will be quite high - taking account of the rate (say 5.75%) & an annual fee of €5k pa - this amounts to well over 10% pa, given you wont be fully drawndown for the full year.

From a Bank's point of view, the advantage to Invoice Discounting is that it offers the Bank a way to control how much you are borrowing, while also offering you the potential to grow your borrowing, when required. Clearly, as your debtors book grows, the Bank will discount more debts & release more funds (assuming they qualify, for the Bank's discounting). However, you may quickly find some customers not being acceptable to the Bank, due to credit periods of more than 90days being taken, or because the Bank is taking too much risk on this customer, for some of it's other Invoice Discounting clients (i.e. There may be 1000 companiese discounting invoices to (say for example) Dunnes Stores before you came along & the Bank feels it's taking enough of a risk on Dunnes Stores already, so wont want to discount your invoices also).

Hope this helps.

Regards

G>
 
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