Article Understanding & Comparing Factoring and Invoice Discounting Quotations

This article covers the structure and some key considerations when reviewing and comparing 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 Charges - need to be compared on a like for like basis. You should work out how much the facility will cost you including service charge, discount charge and other charges for services such as receiving payments. You should not just compare any single component of the pricing.

Funding - calculate the amount of funding release by each factoring company and ask them to provide you with confirmation fo the level of funding that will be released. There are numerous components to the funding formula in the case of some factors e.g. early payment percentage, prime debtor restrictions, funding/credit limits and other reserves. All of these need to be understood in order to make a fair comparison between different offers and quotations.

Other Security - consider the differences in security that is required. Some factors ask for personal guarantees and in some cases these may be limited either in value or in terms of the nature of the gurarantee (you should seek legal advice before entereing into any legal agreement). You also need to consider any other security being requested by the factor.