Credit Management July and August 2021

THE HITCHHIKER’S GUIDE TO INTERNATIONAL TRADE •
HITCHHIKERS GUIDE TO FINANCE
INVOICE POWER
How can invoice finance help companies trading
internationally get paid? Part 1.
AUTHOR – Lesley Batchelor OBE, FCICM
TRADING with overseas buyers
tends to carry more risk than
trading domestically, although
it does offer opportunities for
huge growth. One of the riskiest
elements of exporting is usually
around getting paid and therefore it is important
that sellers consider how they can reduce this
risk.
There are several ways you can de-risk
getting paid, and each has its own advantages
and disadvantages. These include payment
in advance, letters of credit, and trade credit
insurance. In this article, we take a look at
invoice factoring and confidential invoice
discounting.
INVOICE FACTORING
Invoice factoring involves a third party, a
factoring company, buying your invoices at a
lower than face value price, and then recovering
the full value of the invoice from your customer.
Essentially, they are buying the debt from you
and it is they who take the risk of not getting
paid.
PROS AND CONS
The biggest advantage to factoring your invoice
is that you definitely get paid and in a timely
manner. This removes the risk of not getting
paid and doesn’t compromise your cash flow.
The most obvious disadvantage of factoring
is that you lose a proportion of the value of
your invoice. This will need to be considered
when setting your sale price. Most factoring
companies will also expect to take your whole
sales ledger, rather than you identify and select
the riskiest contracts to insure. This means that
you will have to pay fees even for very low risk
invoices. This allows the factoring company to
spread their own risk.
Because the factoring company deals directly
with your customer to recover payment,
you must trust that they will deal with your
customers in the same professional way that
you would, otherwise you could potentially
risk damaging your trading relationship
The biggest
advantage to
factoring your
invoice is that
you definitely
get paid and in a
timely manner.
This removes the
risk of not getting
paid and doesn’t
compromise your
cash flow.
by association. There is even potentially a
reputational risk as some buyers may associate
factoring with companies who are struggling
financially, although nowadays this is part of the
set-up discussion with the factoring company.
CONFIDENTIAL INVOICE DISCOUNTING
Confidential invoice discounting is similar
to factoring, with the main difference being
that your buyer remains unaware that a third
party is involved as you will always deal with
them to secure payment. Confidential invoice
discounting is facilitated by an invoice finance
provider. You invoice your customer and send
a copy of the invoice to the invoice finance
provider. They then pay an agreed percentage
of the invoice, usually within a couple of days.
When the customer pays their invoice, you
receive this minus a fee.
PROS AND CONS
As with factoring, the main benefit is that you
receive a payment very quickly. You also retain
the relationship with the customer, so you have
control of the whole process. The customer
remains unaware that a third party is involved
so there is no negative association. Confidential
invoice discounting is usually less expensive
than factoring.
As with factoring, you lose a percentage of
each invoice and most invoice finance providers
will want your full book. With this method
there is still an element of risk if the customer
does not pay as you wouldn’t receive the final
balance.
If you find that you wish to finish either type
of agreements with your providers, you are
normally free to do so – check your agreement.
However, any monies that have been paid to
you for invoices that have not yet been paid by
the customer would have to be given back to the
provider and this needs to be carefully planned
to avoid impacting your cash flow.
Lesley Batchelor OBE, FCICM
COO & Commercial Director at Open
Borders Direct.
As with factoring, the main benefit is that you receive a
payment very quickly. You also retain the relationship with
the customer, so you have control of the whole process.
Advancing the credit profession / www.cicm.com / July & August 2021 / PAGE 32