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Available finance will be generated by the factor based on your total outstanding customer invoices at the commencement date of your invoice finance facility. This will give you an initial injection of cash on day one.
Thereafter you will be requested to 'notify' the sales invoice values that you have raised each particular day, week or period (however often you choose) to the factor. The method of which can vary and is detailed in
this guide under administration. Based against this changing trade debtors ledger the factor will create available finance for you to 'drawdown' from your facility to your current bank trading account as you so wish.
You do not have to take the full availability and will pay interest charges only on the amount that you use.
This availability of finance is naturally determined by the size of your outstanding debtor book against which you will have agreed a percentage availability, typically 70-90%. This percentage will vary from company to
company. As the nature of each business differs so do the areas that effect the 'collectability', according to the factor, of your debtors. Therefore then it is wrong to assume that you will necessarily obtain the same
'pre-payment' as another business, this will be assessed specific to your company and according to the criteria of the particular factor. (NB not all factors are the same).
In addition to agreeing with the factor the percentage available to draw, the factor will advise you of any of your customer's debts that will be 'unapproved' for funding. Again this can vary significantly between
factors and again stresses the importance of speaking and dealing with the right factor for your business. Unapproved debts though should be minimal, if they are not then you are speaking to / using the wrong company.
Typical unapproved debts may include, outstanding invoices older than say 3 months, invoices for the sale of fixed assets (opposed to trade debts), invoice raised in advance of delivery etc.
An example is:
Xyz Ltd total outstanding debtors today is £325,000
| Unapproved debt is | £ 11,000 | over 3 months old from the date of invoice. |
 | £ 6,000 | relates to a pro-forma invoice issued. |
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| £17,000 | £325,000 - £17,000 = £308,000 |
Agreed prepayment at 80% is: £ 246,400 available finance.
It is not required that you borrow the full availability of funds that is generated. Against the above this business though may request from the factor any amount between £1 - £246,400. This will be transferred to the
company's bank trading account.
The following day the company's trade debtors may have altered. For example an additional £23,000 of invoices may have been raised and £10,000 of receipts banked. The ledger will therefore total £338,000. Assuming
unapproved debts remain the same, the availability of cash under the facility will now be £256,800. The £10,000 of receipts reducing the amount of any borrowed funds, just as if you had banked the amount against an overdrawn bank account.
In practice you will create availability and draw finance against your total ledger. Although focusing, for the purpose of this explanation, on one invoice. You will be given say 80% of the gross value of this
invoice from the factor immediately, with the remaining 20%, less the administration charges, when your customer pays the invoice.
Whilst initially you may see this as complex, it is in fact simple. Should you be using a factor that makes it difficult then you are using the wrong factor. You will know what is owed to you, you will know what percentage advance has been
agreed with the factor and hence you will know what funding is available to you.
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