Article - Understanding & Comparing Factoring and Invoice Discounting Quotations

This article covers the structure and some key considerations when reviewing a factoring or invoice discounting quotation or quote. These may also be referred to as the "offer" or "offer letter" or "facility letter".

WHAT IS A QUOTE / QUOTATION?

When a business is considering using factoring or invoice discounting it is often the case the directors of the business will contact one or more factoring companies (also known as factors) in order to obtain quotations. A quotation (or quote) confirms the structure of the deal that the factoring company are prepared to offer, both in terms of the cost, in terms of the financing or funding package and any additional security that the factor is intending to take.

KEY CONSIDERATIONS WHEN RECEIVING & COMPARING QUOTES / QUOTATIONS

There a number of considerations when comparing what we tend to collectively refer to as "quotations" or "quotes".

First is the legal significance of the document that the factor has provided. In some cases an offer "in principle" is made. This can often be produced by the sales person and really only serves as an indication of the structure of the deal that the factor is prepared to offer. In many cases, the production of a formal quotation or offer letter comes further through the process. Even so, the quotation or offer letter may not confer any legal obligation on the part of the factoring company (you should seek legal advice from your solicitor to be sure about the legal status of the document you receive). Indeed in many cases the offer letter only forms part of a much more comprehensive legal agreement which specifies exactly how the facility will operate.

The second issue is understanding the various components of the quotation.

FACTORING & INVOICE DISCOUNTING TYPICAL QUOTATION CHARGES

Firstly, there are the charges:

SERVICE CHARGE & MINIMUM ANNUAL SERVICE CHARGE

These are typically composed of a service charge or administration charge which will usually be a percentage of the value of the invoices that are factored. There is also normally a minimum service charge quoted which is either charged monthly, quarterly or annually. This provides the factor with the minimum income they expect from the facility and serves to protect them in the event that their client’s turnover falls short of the expected financial projections.

DISCOUNT CHARGE

The second category of charge is the discount charge which works in a similar way to an interest calculation on the value of the clients liability to the factoring company.

OTHER CHARGES

There may be other charges which may or may not be explicitly stated within the quotation - it is prudent to question the factor about these. These charges could include charges in respect of electronic transfers, requests for reports, returned (bounced) cheques etc.

ARRANGEMENT FEE OR COMMITMENT FEE

There may also be an arrangement fee or commitment fee. Normally, an arrangement fee refers to a one off fee that is paid and not refunded whilst a commitment fee may be refunded after commencement. You should question the factor about the exact nature of such fees.

FUNDING - CALCULATION OF AVAILABILITY

Secondly, the quotation will normally outline the basis for the calculation of the funding. Typically there will be and early payment or prepayment percentage which is the percentage of each invoice value that the factor will make available. However, bear in mind that there may be further retentions against this amount that will affect the actual level of funding that you are able to access. Once again it is prudent to question the factor about exactly how they calculate the available level of funding. For example, the facility may be subject to a restriction against major debtors (prime debtor restriction or concentration reserve) or there may be individual funding limits imposed in respect of each debtor or credit limits if your facility is non recourse i.e. includes bad debt protection.

If your quotation is for recourse factoring, there will be a recourse period after which funding is withdrawn. If it is non recourse, there will be a period after which the factoring company will pay the balance of any covered debt to you under the terms of the bad debt protection that they are providing.

The quotation may also state the maximum value of the facility often known as a payment ceiling or refer limit. This is the maximum level of liability to the factor that you may reach at any time. Bear in mind that this is only the maximum ceiling and does not reflect the level of funding that you can expect to receive.

ACCEPTING THE FACTORING OR INVOICE DISCOUNTING QUOTATION

Lastly, the quotation may have and area for you to sign and accept the quotation. It is prudent to consult your solicitor before signing any legal documentation.

We hope that this article provides you with some additional guidance regarding quotations and letters of offer. However, our advisers are only a phone call away and they would be happy to talk through the detail of your quotations with you.

Email: info@cashflow-acceleration.co.uk or telephone: 01892 784183

or complete an: ONLINE QUOTATION SEARCH REQUEST

For further information about Factoring follow this link

For further information about Invoice Discounting follow this link

Information about Online Quotations

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