I Hate Invoice Discounting and Factoring!

This was a cry that I used to hear frequently from managing directors of SMEs. When I asked them why, it became clear that some were speaking from past experience and others just repeating what they had been told.

Why has one of the best and most useful forms of funding got such a bad reputation in some quarters? The answers date back from a few years ago and certainly pre-recession.  In those days the providers could pick and chose who they would do business with and were inflexible with their terms and companies were growing so fast that they needed this type of finance to avoid over-trading and were not particular about whom they obtained it from.

The providers would:

  • Insist on the client putting their complete debtor ledger through the facility, even those invoices where payment was made promptly
  • Demand a full personal guarantee from all of the directors
  • Impose a 3 year agreement with a 6 months cancellation clause added on the end
  • Make factoring clients give up the control of their own debt collection
  • Not disclose all the hidden charges that greatly increase the costs

The recession, however, has changed the market place dramatically. The tide is turning away from the big Banks and towards smaller independent providers.

These independents are much more flexible with their terms and conditions and the financial products that they offer.

Some of the biggest changes include:

  • Specialist providers that concentrate on single industries, so that their knowledge and understanding of that sector’s challenges, makes transacting business with them much simpler. These specialist sectors now include:
    • Construction
    • IT
    • Contractual debt
    • Care Homes
    • Pharmacists
    • Auto body shops
    • Selective Invoice Discounting and Factoring. Many companies do not need to undertake full debtor ledger facilities. They would like to have a provider that will just take a few invoices at certain times of the year, such as when the VAT, or corporation tax is due, or when a large order stretches their cash flow to the limit. There are now four providers that offer this selective service. There is a one off set up fee and then the client can decide when and how often they wish to make use of it.
      • Linking selective invoice discounting to trade finance is another interesting new development. Normally the provider would want to link the trade finance to a full ledger Invoice Discounting facility, which makes it very expensive. Now there is now a provider that will link the trade finance on a single shipment of goods, to only those invoices that are related to that shipment.
      • Personal guarantees are still required but now they can be limited to just 10 to 15% of the facility limit.
      • The introduction of new factoring products such as CHOCCS and Agency factoring where the client still collects their own debts.
      • Standard agreements are now offered of only 12 months with a 3 months cancellation clause. Some providers will offer even shorter contracts or 6 months get out clauses.


So the moral of the story is that the Invoice Discounting and Factoring World has changed with the times and that the independent suppliers are much more flexible than the Banks, so shop around and do not take the first offer that is made to you. The providers now need your business so negotiate, negotiate, and negotiate and you will get a deal that suits you and not one that just suits the provider.

Written by Peter Kelly

Peter Kelly
Pegasus Funding Resources
01932 244810
Funding Solutions for your Company

5 Responses to “I Hate Invoice Discounting and Factoring!”

  • Hi Peter,

    Nice post! I am a fan of this kind of funding and have recently come across a provider that will fund a single invoice as a stand alone deal without the need to commit to the service on an ongoing basis or pay admin charges or set up fees at very competitive rates.

    Hopefully this is the way forward as this will be of great importance to SMEs; particularly growing companies, who want easy access to funding and flexibility.

    Best regards,

  • Peter, It’s extraordinary that we still live with the legacy of negativity towards discounting/factoring when it so clearly represnts the best and most flexible funding option for most SME’s in most situations. Your summary is very good and just shows what variety of products is available. I wish you luck in getting this message across!

    • Hi Jeremy,

      I am glad to see that you have read this blog. It is something I feel passionate about and not nearly enough management teams understand the benefits that this type of funding offers them.



  • Nice to see someone giving the other side of the argument for a change. You are absolutely right. For small businesses and start ups, cash is crucial. Selective invoice discounting enables them to grow the business without having to go cap in hand to their banks who will take forever, demand security and take forever to agree a credit facility. Most factors can react within a few hours and as long as the debt is provable and the customer creditworthy, there should be no problem getting a deal funded.

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