16 Mar How To Qualify For A Secret Invoice Factoring Facility

It’s one of the most common questions asked by business owners that are new to invoice factoring, but do you really need it to be a secret & will you qualify?

What is invoice factoring? Lenders provide a line of credit against your on-going outstanding receivables (invoice) balance. For example, you invoice $100,000 per month. A lender will lend you $80,000 of this each month. Each time invoices are repaid your credit limit adjusts just like a bank overdraft and you can redraw on your limit. This allows you to draw on funds tied up in unpaid invoices as soon as you raise invoices on a daily or weekly basis instead of waiting for customers to pay 30-90 days later. 

Secret or “confidential invoice factoring facilities” as they are more commonly known are usually reserved for businesses that have an established track record, with evidence of sound trading history, invoice collections processes and have a streamlined supply chain that includes receiving purchase orders, invoicing customers and receiving proof of delivery paperwork that can be produced.

Effectively the financier is looking to offer these facilities to business owners that can demonstrate that they can look after their back office correctly without the need for any collections assistance from a third party.

If you’re a business that can only produce an invoice without any other documentation, then you won’t qualify as this increases the risk to the lender that (a) any product/job was ordered (b) the product/job was every delivered or completed. The lender is assessing that in the event of a catastrophic failure can they prove that all the invoices presented for funding are real and collectable from customers without dispute or minimal dilution (offsets, deductions etc).

Once last thing worth mentioning is lenders are very cautious of businesses that offer products on “sale or return”, “contra arrangement” or have huge marketing discounts or deductions that are common when selling to large retailers like Woolworths. This is not to say they still won’t finance you however you will likely see a significant reductions against these customers/debtors or they may be totally excluded from your “available” borrowing base.

Using MYOB? Qualify for revolving line of credit here.

What’s the basic level of disclosure to my customers?

There are three (3) main differences between a confidential and a disclosed invoice factoring facility. Firstly in a disclosed situation, upon setting up your account lenders will send out letters to your customer base advising them that there is a change of banking details and that a financing arrangement is about to take place to help grow your business. Secondly, on each of your invoices the lender will require what’s called an “assignment notice” this is a simple two-line notice that states the invoices are assigned to the finance company and to pay into the new bank account details provided. Lenders work closely with their clients when advising of the change in details and almost 100% of the time they only ever speak with the accounts payable departments of your customers.

The third difference and is not limited to just disclosed facilities is the finance company may contact your customers on your behalf to check that invoices have gotten to the right place and to check when they are likely to be paid. Lenders aren’t debt collectors and are careful not to disrupt your relationships. This process is called “verification” or “asset checking”.

The main reason they perform this practice is for the simple fact that invoices are their only security, each invoice is an asset they have lent against and from time to time they need to ensure they still exist.

If you qualify for a confidential facility, almost 100% of the above three points will not be performed, however most lenders still require you to update bank details to an account controlled by the lender which is held in your name. This allows the lender to control the repayment of funds and maintain an accurate funding limit to your business without having to chase your for payments every week.

Why would you need it confidential in the first place?

Over the years I found that businesses turning over less than one million in sales are usually more concerned with disclosing to customers that they have finance than larger turnover companies which never seem to be bothered by it at all. This is because smaller businesses are usually earlier in the growth cycle and are sensitive to potentially disrupting their customer base, as the business grows the business owner soon realizes that everyone is using finance and it’s not how you finance your business that’s of concern to your customers, it’s whether you deliver your product or service on time that counts.

In fact customers sometimes see a very positive side to a supplier taking on an invoice factoring facility as they know that the money is being advanced upfront and they can enjoy normal or extended credit terms without being pinged regularly to pay invoices.

A confidential facility suits businesses that already have a sound back office and naturally would not require any “traditional” factoring services, such as collections assistance, debtor monitoring and credit management. In makes more sense, if you qualify to take this option for obvious reasons.

What’s the basic qualification recap?
  • Been in business for 2 or more years
  • No tax arrears
  • Showing trading profit
  • Sound paperwork to support invoicing
  • You don’t invoice progressively (construction usually)
  • Proof of collections & solid back office
  • You sell to at least 10 or more good credit customers
  • Ideally Directors are property owners

 

Can you get a confidential facility without the above?

The answer is yes. Within Australia there are a handful of factoring providers that offer confidential facilities even when you don’t meet the above criteria however you are still required to meet the basic level of invoicing, including producing an invoice with a proof of delivery (POD) or proof of debt that lenders sometimes refer to.

If you insist on needing it confidential and you don’t meet all the requirements then the lender is going to want what’s called “comfort security”. To show the lender that you can take of everything yourself and to trust that the invoices you’re presenting are true and correct you will need to offer property security, usually in the form of a second mortgage or caveat, which is referred to as an “unregistered second mortgage”. Some lenders also accept other forms of security like equipment assets, cars and sometimes boats.

Basically, you’re asking the lender to take some risk and the lender is asking you to put some skin in the deal to provide a level of trust. Remember the lender has no idea who you are or your history.

Got any questions about invoice factoring facilities? Ask me below or email leigh@loandesk.com.au

About Leigh Dunsford

I am a small business finance & lending columnist at Loandesk, teaching entrepreneurs what loan options are available to them in Australia, explaining the differences between each loan type & how to position themselves for the best chance of getting approved for their perfect loan. My thoughts have been published on Startupsmart, CEO Magazine, Smartcompany & more...

Connect on Linkedin
View All Posts

Your Email (required)