Getting paid for your services can have a real impact on your cashflow. But help is at hand.

Invoice finance, also known as factoring or ‘debt factoring’ – involves selling your invoices to a third party. In return they will process the invoices and allow you to draw funds against the money owed to your business. Essentially, these companies provide a finance, debt collection and ledger management service.

It is commonly used by businesses to improve cashflow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies. Invoice discounting is an alternative way of drawing money against your invoices.

However, your business retains control over the administration of your sales ledger. As well as providing finance, it offers valuable support services and credit insurance.

This guide gives information on how factoring and invoice discounting work, the advantages and disadvantages, different types of factoring and invoice discounting, the cost, and how to choose a factor or discounter.

How factoring works

Factoring provides a fast prepayment against your sales ledger. It allows you, at a cost, to flexibly increase your working capital and improve cashflow.

Factoring is offered to businesses trading with other businesses on credit terms. It is not normally available to retailers or to cash traders.

When factoring starts

Factors can be independent, or subsidiaries of major banks and financial institutions. Whatever their background, they will want to meet you, visit your business, review your financial situation and study your business plan to evaluate your suitability for a factoring facility.

Credit limits might be required – if so, you must agree how they will operate. After signing an agreement, the factor will typically agree to advance up to 85 per cent of approved invoices. Payment is usually made available within 24 hours.

Usually all sales go through the factor. Check the notice period to the end of the service – most factors require three months’ notice, but some require longer. Negotiate if you are not happy with the notice period.

Factoring is a complex, long-term agreement. It is advisable to consult your solicitor on the legal and financial implications of factoring.

When an invoice is raised

• You raise an invoice, which has instructions to pay the factor directly and send it to the customer. Send a copy of the invoice to the factor.

• The factor makes available an agreed percentage of the invoice for you to draw as you require.

• The factor issues statements to the customer on your behalf. It operates credit control procedures including telephoning the customer if necessary.

• When an invoice is paid by the customer.

• The customer should pay 100 percent of the invoice directly to the factor.

• The factor pays the balance of the invoice to you.

When an invoice is not paid

If an invoice is not paid, responsibility for paying the debt will depend on the type of agreement – either recourse factoring or non-recourse factoring.

Charges

The agreed factoring fee is taken when the invoice is received by the factor. The discount charge works like interest and is calculated against the balance of funds drawn and usually applied on a monthly basis.

There are numerous advantages to factoring, but also some drawbacks.

Advantages

• Factoring provides a large and quick boost to cashflow. This may be very valuable for businesses that are short of working capital. A business that is owed £500,000 may be able to get £400,000 or more in just a few days.

• There are many factoring companies, so prices are usually competitive.

• It can be a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business.

• It assists smoother cashflow and financial planning.

• Some customers may respect factors and pay more quickly.

• Factors may give you useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers.

• Factors can prove an excellent strategic – as well as financial – resource when planning business growth.

• You will be protected from bad debts if you choose non-recourse.

• Cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders.

• Factors will credit check your customers and can help your business trade with better quality customers and improved debtor spread.

Disadvantages

• Queries and disputes may have to be referred on and may have a negative impact on your available funding. For this reason, factoring works best when a business is efficient and there are few disputes and queries.

• The cost will mean a reduction in your profit margin on each order or service fulfillment.

• It may reduce the scope for other borrowing – book debts will not be available as security.

• Factors will restrict funding against poor quality debtors or poor debtor spread, so you will need to manage these funding fluctuations.

• It may be difficult to end an arrangement with a factor as you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet.

• Some customers may prefer to deal directly with you.

• How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation.

• You have to pay extra to remove your liability for bad debtors.

Suitability

Your business may be suitable for factoring and will benefit most if it has:

• An annual turnover of at least £50,000, although some factors will consider start-ups and smaller businesses.

• A good spread of customers – there  may be funding restrictions if a single customer accounts for more than about a third of turnover

• Simple, non contractual debt that is easily proven.

• Low levels of debt more than 90 days overdue.

Your business may not be suitable for factoring if it:

• Sells to the public – factoring is only available for sales to commercial customers.

• Has too many small invoices.

• Has too many disputes and queries.

• is not a sound, reputable and trustworthy business.

• Has customers that make part payments or stage payments.

• Has complex contractual arrangement or warranty provisions.

Recourse factoring

In recourse factoring, the factor does not take on the risk of bad debts. Put another way, the factor will be able to reclaim their money from you if the customer does not pay. The factoring agreement will specify how many days after the due date for payment you must refund the advance. Whether you refund the advance or not, you will still have to pay the fee and interest.

Recourse factoring is cheaper than nonrecourse factoring and may have fewer requirements concerning your customers and your systems. This is because you are taking the bad debt risk. For example:

The factoring agreement requires payment to be made within no more than three months. It also states that 80 per cent of each invoice will be advanced.

On 30 April an invoice for £10,000 is issued and the factor advances £8,000. On 31 July, if the customer has not paid, £8,000 must be repaid to the factor. There is no refund of the factoring fees.

Non-recourse factoring

In non-recourse factoring, the factor takes on the bad debt risk. It accepts specified risks around the debtor’s failure to pay, but it does not insure against debts that are unpaid because of genuine disputes. Because of this, non-recourse factoring will be more expensive than recourse factoring.

You never have to refund the advance to the factor, but you must pay interest to the factor for any advance against the invoice for the period prior to the bad debt payment being made.

The factor takes over all rights to pursue the customer for payment. This includes the right to take legal action.

Whether you have one part time helper or a workforce of thousands, being an employer comes with a number of responsibilities – you have to make sure they are safe in the workplace, they are paid the right amount at the right time and they have all the rights that employees elsewhere in the country enjoy. You also have to make sure they – and you – are protected if things go wrong. Becoming an employer is a legal minefield, with huge penalties if you get it wrong. Follow our simple guide to ensure you stay on the right track.

• Hiring

When the time comes to take on new staff, the most important factor for you is to make sure you have the right person for the job – the right skills, the right attitude and, often the right personality. There are, however, other issues you need to take into account if you don’t want to end up on the wrong end of a lawsuit or prosecution. The most important issue here is discrimination.

It’s against the law to choose or refuse anyone based on race, gender, marital
status, sexual orientation or disability. All this needs to be considered before

you decide on the perfect candidate; any job adverts must be non-discriminatory and you need not only choose your new employee based solely on their ability, but you must be seen to be doing so too. Remember, once you have hired staff, you must have employers’ liability insurance.

• Salaries

Once you’ve made your hire, you need to pay them. Most full time employees must be paid on the Pay as You Earn (PAYE), where employers make the deductions for tax and national insurance and then pay HMRC directly. Businesses can register as an employer at the Revenue’s website.

How much you pay your staff is down to you, of course, but it must not be less than the legal minimum wage – £4.92 an hour for those aged 18-21 and £5.93 an hour for anyone older. The dates and times when you pay salaries should be set down in any employment contract, and make sure you don’t miss a payment – you could be held liable for any problems encountered by your employees, such as missed payments.

• Employment contracts

In theory you don’t have to provide staff with a written employment contract. But in practice, having one will protect both you and your employee. In it should give details of the duties and responsibilities of the employee, along with their rights.

You should include details of their salary, holiday entitlement, any benefits
such as a pension, notice period and – if your business has one – disciplinary and grievance procedures.

While employment contracts vary – an office worker will have different terms to a long distance lorry driver, for example – you don’t necessarily need to get the lawyers involved. Templates and example contracts are available online for free.

• Firing

Terminating a member of staff can be one of the most difficult jobs a business owner has. Aside from the emotional difficulty, and the impact on the morale of other staff, it’s a legal minefield.

If your member of staff has committed gross misconduct -committed a crime, or put other people in danger while at work, for example – then they can be summarily dismissed. But if you want to let someone go for poor performance, it’s a little more complicated.

The key here is to keep written records of everything you do. It’s important to be able to show you have tried to encourage your staff to improve their performance, and have warned them in advance of the potential consequences if they fail to do so.

There are thousands of cases in the UK each year where employees sue for unfair dismissal, and many of them, says employment lawyer Sam Allen, are down to lack of communication: “If it comes as a surprise to someone they are being let go for poor performance, they are much more likely to want to have their side of the story heard.”

I f your employees do anything that results in a legal claim while working for
you, your business could be held liable for any damages. Public liability insurance and potentially product liability insurance will help protect you from any claims.

• Health and safety

The Health and Safety at Work Act 1974 is the main piece of legislation employers need to consider. As an employer, you have a duty of care to your employees, which basically means the work environment must be safe, equipment must be checked, safe working practices must be implemented and materials are stored and used carefully.

You will also need to provide first aid facilities and have plans in place should an accident or emergency take place. Some accidents or emergencies will need to be reported to the HSE if they occur.

Even the best laid plans and the most comprehensive policies can’t always
protect you from things going wrong.

Thankfully there are a number of insurance policies that you can – in some cases must – take out that will mitigate some of the costs to your business in the event of a claim.

• Employers’ liability insurance

This is a legal requirement if you have employees, which is defined as someone who is working for you on your premises. It’s there to cover you if any employee claims for an injury or ill-health while working for you. This doesn’t necessarily just mean someone falling off a ladder or slipping on an icy surface; some of the biggest claims have arisen from problems nobody knew about at the time, such as exposure to asbestos or other harmful
chemicals. And as a result, the claims can go back decades – because the evidence of harm may take some time to come up, it’s worth keeping a record of who your insurer is for any given period.

• Public liability insurance

Over £1 billion a year is paid out in public liability insurance claims, and many small businesses go out of business because they are not covered. A public liability insurance policy will protect you from claims from members of the public who visit your premises – so if you have visitors to your
place of work, then this is a must. It will also cover you if you cause damage
to a third-party property while carrying out your business.

• Product liability insurance

If you manufacture, repair or adapt any products, then product liability insurance will protect you from any claims related to injury or damage as a result of a fault or flaw in the product. The price of a policy for this varies greatly, depending on the product in question – the greater the risk of
the product, or the more damage it could do, the more expensive it will be.

• Directors’ insurance

Just because you run a limited company doesn’t mean that you are immune from any potential claims. “It’s one of the areas that few businessmen know about and the repercussions can be huge,” says Tarling. Company directors and officers must comply with over 200 areas of statutory liability under the various Companies Acts, and can face personal costs if they are found to have acted improperly. This cover provides insurance for those who have inadvertently acted outside the rules and face penalty.

Your first start should be your local Business Link. This is a Government agency, organised regionally, that provides information and support for all small businesses – whether they are start-ups, established companies or firms looking to expand. It’s particularly strong on the administrative side of running a SME, with guidance on taxation, employment, finance and regulations. But it also has plenty of useful tips on marketing, international trade and grants, and runs local events that provide advice and networking opportunities.

The Federation of Small Businesses is a member organisation that campaigns on behalf of SMEs. It promotes the interests of small businesses in Parliament and in the media, but it also gives its members a range of benefits. Members are entitled to legal information, and can download templates of legal documents.

Members also get tax advice and there are a number of special deals you can access when it comes to banking, loans and credit cards. “Our purpose is supporting small businesses, and in addition to our lobbying work, we’re always looking for ways to give our members more help,” says a spokesman for the FSB.

It’s also worth visiting the websites of the major banks; they all offer accounts and services to small businesses, and many of them have plenty of advice to companies, which is available whether you are a customer or not. Lloyds and HSBC have two of the better websites, but most will have something of interest. Coverzones has plenty of useful and easy to understand information on specific insurance policies that small businesses need to consider, including laibility and indemnity cover.

As part of the Government’s long-term strategy to get more of its services online, there is now a wealth of useful sources of information for small businesses, many of them available through Direct.gov. The site is generally set up for individuals, so if you’re a sole trader then you can receive guidance on your rights and responsibilities, as well as information on tax and benefits. For larger companies, the taxman will be able to explain all about VAT, corporation tax, employers’ tax and the like. It’s particularly useful for companies undertaking new ventures, such as employing someone for the first time or selling products and services overseas – each of these come with potential liabilities so it’s a good place to start if you’re considering such a move.

The Department for Business, Innovation and Skills concentrates mainly on the regulatory side of running a small business. The site is currently being updated, so at the moment can be a little difficult to navigate, but if you can find it there’s plenty of help available.

Whether you’re just starting out or your business is expanding, many business owners need to think about hiring an extra pair of hands at some point. But employing staff is not always as simple as it seems – there is a huge amount of responsibility that comes with it, and businesses that fall foul of the laws could find themselves in very hot water indeed.

Hiring

When the time comes to take on new staff, the most important factor for you is to make sure you have the right person for the job – the right skills, the right attitude and, often the right personality. There are, however, other issues you need to take into account if you don’t want to end up on the wrong end of a lawsuit or prosecution. The most important issue here is discrimination. It’s against the law to choose or refuse anyone based on their race, gender, marital status, sexual orientation or if they have a disability.

All this needs to be considered before you decide on the perfect candidate; any job adverts must be non-discriminatory and you need not only choose your new employee based solely on their ability, but you must be seen to be doing so too. Remember, once you have hired staff, you must have employers’ liability insurance.

Salaries

Once you’ve made your hire, you need to pay them. Most full time employees must be paid on the Pay as You Earn (PAYE), where employers make the deductions for tax and national insurance and then pay HMRC directly. Businesses can register as an employer at the Revenue’s website.

How much you pay your staff is down to you, of course, but it must not be less than the legal minimum wage – £4.83 an hour for those aged 18-21 and £5.80 an hour for anyone older. The dates and times when you pay salaries should be set down in any employment contract, and make sure you don’t miss a payment – you could be held liable for any problems encountered by your employees, such as bounced direct debits and missed payments.

Employment contracts

In theory you don’t have to provide staff with a written employment contract. But in practice, having one will protect both you and your employee. In it should be details of the duties and responsibilities of the employee, along with their rights. You should include details of their salary, holiday entitlement, any benefits such as a pension, notice period and – if your business has one – disciplinary and grievance procedures.

While employment contracts vary – an office worker will have different terms to a long distance lorry driver, for example – you don’t necessarily need to get the lawyers involved. Templates and example contracts are available online for free.

Firing

Terminating a member of staff can be one of the most difficult jobs a business owner has. Aside from the emotional difficulty, and the impact on the morale of other staff, it’s a legal minefield. If your member of staff has committed gross misconduct – committed a crime, or put other people in danger while at work, for example – then they can be summarily dismissed. But if you want to let someone go for poor performance, it’s a little more complicated.

The key here is to keep written records of everything you do. It’s important to be able to show you have tried to encourage your staff to improve their performance, and have warned them in advance of the potential consequences if they fail to do so. There are thousands of cases in the UK each year where employees sue for unfair dismissal, and many of them, says employment lawyer Sam Allen, are down to lack of communication: “If it comes as a surprise to someone they are being let go for poor performance, they are much more likely to want to have their side of the story heard.”

If your employees do anything that results in a legal claim while working for you, your business could be held liable for any damages. Public liability insurance and potentially product liability insurance will help protect you from any claims.

Health and safety

The Health and Safety at Work Act 1974 is the main piece of legislation employers need to consider. As an employer, you have a duty of care to your employees, which basically means the work environment must be safe, equipment must be checked, safe working practices must be implemented and materials are stored and used carefully.

You will also need to provide first aid facilities and have plans in place should an accident or emergency take place. Some accidents or emergencies will need to be reported to the HSE if they occur.

From October 1st, the rules are changing for all UK limited companies. The Companies Act 2006 comes into force on that date, replacing the old 1985 Act. Here are the key issues businesses need to be aware of:

Directors’ addresses

Every director will have a service address and a usual residential address. The service address for each directorship will be publicly available, while the residential address will only be made available to public authorities and credit reference agencies. Unless you change the service address, your current residential address will automatically be listed under both categories.

Alternative address for registers

There will be changes to the arrangements for inspecting a company’s registers. These registers may be held at the registered office address or at a single alternative inspection location (SAIL). You must notify us if you set up a SAIL address or if the SAIL address is moved, and you may only have one SAIL address for a company at a time. Once the SAIL address is set up, you can move some or all registers to the SAIL address by notifying Companies House. The simplest way to register this address will be via the WebFiling service from October.

Easier to set up a company

A number of changes have been made to make it easier to set up a company. There are also changes to company articles for new companies. They will include the company’s objects, liabilities and assets – all of which were previously in the memorandum.

Notification of articles changes

You must send any amendments to the company’s articles to Companies House within 15 days. Otherwise you could be liable to a criminal offence and a civil penalty of £200.

UK wide company registry

Northern Ireland company registry will be integrating with Companies House.

Forms

All Companies House forms will change from 1st October 2009.
The new forms include:

• Companies Act 2006 information requirements
• new numbers
• additional guidance notes
• details of any fee (if applicable)

The new forms must be used for all company events that take place on or after 1st October 2009. If you use an old form it will be rejected.

Company events which take place before 1st October must be submitted on 1985 Act forms.

Fees

To cover the cost of running the register, Companies House charges fees for the filing of certain forms such as the annual return, change of name, mortgage and voluntary dissolution. Please remember to send the fee in with a paper form otherwise Companies House will be unable to accept it.

Protecting your company from hijack

From 1st October, the Registrar’s Protected Online Filing (PROOF) scheme will operate under the framework of the Act (section 1070).

PROOF customers are protected from unauthorised changes to their company details. They agree with the Registrar that they will only file certain documents electronically. If a fraudster tries to ‘hijack’ their company by filing a piece of paper, this will be rejected. The Registrar urges all companies to sign up to PROOF. It can now easily be done via the WebFiling service using the company’s authentication code (you no longer need the written consent of each director).

Important tips for companies to make the transition to the new Act a smooth one:

• Try to complete any business with Companies House under the 1985 Act well before the end of September.
• Make sure that you are ready to file electronically in October. If you use WebFiling, this will be easy – the menu screens will guide you through what you have to do.
• Get your company signed up for Protected Online Filing (PROOF).
• Watch out for the new rules in the Act on inconsistent filings. Keep your company’s record up to date and consistent with what we already have on the public record.
• File on time to avoid a penalty. You have one month less to file your accounts. If your company normally files its accounts on 31 January, remember that the deadline this year will be 31 December – nine months after the end of the year as opposed to ten.
• You must send any amendments to the company’s articles to Companies House within 15 days. Otherwise you could be liable to a criminal offence and a civil penalty of £200.