Invoice Finance Facilities – What’s the Difference?

Invoice Finance is a staple within the temporary and contract recruitment industry as they bridge the funding gap from when the candidate is paid until the client pays the agency’s invoice.  However, invoice finance companies will often offer 2-3 different types of facility, depending on the back office capabilities of the agency and their confidence in the collections of the debts.  It is important to know the difference between these types of facilities as not only do the costs differ, but the responsibility placed on the shoulders of the agency can also be incredibly varied.

Below are the 3 different types of facilities that invoice finance companies will offer recruitment agencies as funding solutions:-

  • FACTORING
    Factoring is a funding arrangement where the invoice finance company will look after the running of the facility on a day to day basis. The facility works by uploading the details of each individual invoice to the invoice finance company so they can chase the clients on the agencies behalf.  They will provide the funding on each invoice within the funding period (usually up to 90 days) and if an invoice goes over the funding period without being paid, the funded amount becomes ineligible for funding.  The invoice finance company will not have to complete reconciliations as they will have the only true copy of the sales ledger.  Factoring is often given to new start up recruitment agencies, or if it is clear that the agency has limited back office capabilities.  As the invoice finance company is doing most of the work for the agency, the cost of factoring facilities are often much higher than invoice discounting facilities.
  • FACTORING WITH CHOCS
    Factoring with CHOCS is the next step up from a factoring facility. The facility works in the same way as factoring, but the agency itself will look after the chasing and credit control of the invoices instead of the invoice finance company.  CHOCS stands for Customer Has Own Collection Service and gives the agency better control of chasing the debts.  These kind of facilities are often a way of invoice finance companies seeing if the agency could cope with having an invoice discount facility by relinquishing some of the responsibility.  By moving from a factoring to factoring with CHOCS, the service charge should be lower as the invoice finance company is doing less work on the facility.
  • INVOICE DISCOUNTING
    Invoice Discounting is a funding facility where the agency will look after the running of the facility on a day to day basis instead of the invoice finance company. The facility works by uploading batches of invoices to the invoice finance company, and this has to match the agencies aged debtor reporting which gives a breakdown of the invoices financed.  Each month the agency has to complete a reconciliation to ensure that the aged debtor balance on the invoice finance companies system matches the aged debtor balance on the agencies accounting system.  Furthermore, all of the credit control and collections are completed by the agency as the invoice finance company has no view of the aged debtor report.  When the end of month reconciliation is completed, the invoice finance company will assess if any invoices have become ineligible for funding due to age or above concentration levels.  Invoice discounting facilities are often much cheaper than factoring facilities but the invoice finance company has to be comfortable that the agency can handle the running of these kind of facilities.

Invoice discounting facilities can also be split into Disclosed and Confidential arrangements, which means that either the existence of the facility is disclosed to the client (i.e. the bank details shown say that the invoice has been assigned to the invoice finance company) or that the facility is confidential (i.e. the bank details shown look like the agencies not the invoice finance company).  Again, the decision on if a facility is disclosed or confidential depends on if the invoice finance company is happy with the back office and collections procedures of the agency.

TBOS has helped set up and manage several different invoice finance arrangements over the years.  All of the invoice finance arrangements that are set up by TBOS are confidential invoice discounting facilities as the invoice finance companies see TBOS’ involvement in the back office as a lower risk.  Also, as TBOS handles all of the credit control of all the agencies and has a good reputation for collecting debts, this gives the invoice finance company comfort that the facility and collections are being handled well.

For more information on how TBOS can help you set up and manage your invoice finance arrangements, please contact our office.