A search on Google of 'invoice finance companies UK' gave over 500,000 results in under a second. More and more companies are offering invoice finance.
In addition to increasing competition among service providers, the rise in providers might increase the number of fraudsters trying to defraud these companies so invoice financing companies such as Cash for Invoices Limited, need to be vigilant.
Factoring and invoice discounting are well established forms of invoice finance, but there has been a rise in the number of companies offering a recent variation: single invoice finance.
What is single invoice finance?
As its name suggests, single invoice finance is the purchase of just one invoice from a seller, not its whole sales ledger. Cash for Invoices Limited is an example of a company that provides single invoice finance.
Cash for Invoices Limited will offer to buy an invoice off a seller - such as a SME or sole trader - for a discount (a fee) but will not commit the seller to sell any more and certainly not its entire sales ledger. Cash for Invoices Limited does not enter into a facility to regularly purchase invoices. Instead the seller sells only when it chooses, which might be never again.
Since there is no facility, Cash for Invoices Limited charges no arrangement fee and no ongoing fees, no annual facility review or renewal fee and no facility termination fee. All it charges is the discount for paying for the invoice ahead of its maturity date.
It takes no security either. It deducts up to 10% of the invoice amount upfront and pays this to the seller when the debtor pays on time and in full..
Cash for Invoices Limited's single invoice finance purchase service is therefore simple, quick, and transparent.
Cash for Invoices Limited's risk of buying a fraudulent invoice
Cash for Invoices Limited is exposed to the risk of purchasing a fake invoice sold by a fraudster. To mitigate this risk, Cash for Invoices Limited undertakes due diligence including Know Your Customer (KYC). It will also undertake anti-money-laundering checks in case the fraudsters are also money launderers.
According to Robert Bernfeld, "fake invoices and fake supporting documents are the most common forms of fraud." He also says a company that buys regularly from an established seller might skip key parts of its due diligence standards because of the goodwill and experience to-date it has with that seller and so it misses the fake invoice that the fraudster tries to sell that has a stated value of $8000 (for example) instead of the correct figure of $800.
Regarding single invoice finance, such as that provided by Cash for Invoices Limited, Bernfeld says: "In this instance, the company seeking invoice factoring is less likely to establish a lasting relationship with the factoring company and more likely to take the money and run. The con in spot factoring [a term used inter-changeably with single invoice finance] may work with a company setting up an entirely fictitious business with phony records and credit histories and even a staged verifier who provides made-up information to the factoring company to “verify for accuracy.” "
A hallmark of the fraudster is rushing the buyer for the funds it urgently needs, and they might also be reluctant to verify information requested, says Bernfeld. He warns the buying company: "due diligence, thorough verification, and corroboration are the keys for a factoring business to avoid becoming victims..[and] .taking short cuts should never take the place of verification.."
What is an invoice?
Invoices are a form of trade receivable, i.e., they are an asset on a company's balance sheet representing money to be received by that company at some future date - at the time the debtor pays the invoice. At that time, the debtor (payer of the invoice) will no longer appear on the company's balance sheet and instead it will be replaced by an equal amount of cash (which is also an asset). There is no net increase or decrease in assets, merely conversion from one to another.
If that debtor does not pay, then the asset will be written off as a bad debt (a cost in the profit & loss account) and assets will then reduce (no cash came in). Granting time (credit) to buyers to pay for their purchases is therefore an example of credit risk for the company giving time.
If later - perhaps through credit collection procedures - the debtor pays the invoice, then the bad debt is added to the p&l as a profit (income) and cash increased by the amount received. The assets increase and are offset by an increase in profit (equity on the balance sheet). All is well again.
Selling an invoice to Cash for Invoices Limited
Before the debtor defaults, the company can sell the invoice to a company such as Cash for Invoices Limited that will offer to buy just one invoice when the company wants to sell. There is no commitment for the company to sell, and no commitment for Cash for Invoices Limited to buy. The company wants to exchange an invoice for cash - perhaps it needs the cash sooner than the invoice payment date.
Cash for Invoices Limited will make an offer after conducting due diligence on the selling company and on the debtor especially. The debtor is a key concern for Cash for Invoices Limited because if there is a subsequent default then Cash for Invoices Limited will not require the seller to buyback the invoice. The sale is therefore non-recourse and Cash for Invoices Limited has to suffer the consequences of a default. It will commence steps to recover the debt. These can include issuing letters for payment, appointing a solicitor, making a court claim, or making a claim under a credit insurance policy.
Retention to mitigate credit risk
To mitigate the potential costs of trying to recover payment on an invoice that Cash for Invoices Limited purchased but which goes into default, Cash for Invoices Limited will retain up to 10% of the value of that invoice from the purchase price. If there is no default (the debtor pays the invoice on time and in full) then Cash for Invoices Limited will pay the retention to the seller when the debtor pays the invoice.
Features of single invoice finance offered by Cash for Invoices Limited
In addition to being non-recourse, Cash for Invoices Limited does not require a commitment from the seller to sell all its invoices, nor will Cash for Invoices Limited charge an arrangement fee for a purchase. Cash for Invoices Limited will not ask for ongoing fees because there is no facility between the seller and Cash for Invoices Limited. The transaction is entered into whenever the company needs cash and Cash for Invoices Limited agrees to purchase the single invoice or multiple invoices. Compared to bank factoring facilities, Cash for Invoices Limited's single invoice finance service is far more simple and has no tie-ins and far fewer fees, just one.
Supplier invoice finance offered by Cash for Invoices Limited
Cash for Invoices Limited also helps companies who need more time. Why do they need more time? Because suppliers who have sent them an invoices are demanding payment but the company needs more time to pay.
In such situations, Cash for Invoices Limited can offer to buy the supplier single invoice for cash. That cash is paid to the supplier not to the company Cash for Invoices Limited is helping. Having got the supplier off the company's back, Cash for Invoices Limited allows the company the extra time it needs to get cash and then to use that cash to pay Cash for Invoices Limited for the supplier invoice Cash for Invoices Limited purchased.
Cash for Invoices Limited's single invoice finance service therefore helps companies (sole traders and SMEs) who either need cash or who need more time.
To find out more about Cash for Invoices Limited's single invoice finance service contact Cash for Invoices Limited.