Invoice finance for engineering subcontractors

It usually needs to be a genuine unpaid B2B receivable that is due, valid and not heavily disputed. In engineering, that means checking whether the work has been accepted, whether inspection or certification is still pending, and whether any retention or set-off right could reduce what is payable. A provider will also look closely at the debtor’s credit and the concentration of the ledger.

Neither is automatically better. Factoring normally means the provider handles collections, which can suit firms that want less internal admin. Discounting normally leaves credit control with the business, which can suit firms that want to keep debtor relationships in-house. The right choice depends on how sensitive the customer relationship is, how the business manages collections and how much control it wants to keep.

Possibly, but not automatically. Retentions are often treated differently because part of the invoice is withheld until later conditions are met. The provider will want to understand when the retention becomes payable, whether it is contractually due, and whether the underlying work has been accepted. A retention-heavy invoice may be less straightforward than an ordinary approved receivable.

Not necessarily. Turnover is only one part of the picture. Provider appetite depends on debtor quality, invoice validity, disputes, concentration and the contract terms behind the receivables. A business can have healthy turnover but still have limited fundable invoices if a large share of its ledger is retained, disputed or dependent on one customer.

If most invoices are raised to only a few customers, the finance provider may view the risk differently because one delayed payer can affect a large proportion of the ledger. Concentration does not automatically prevent funding, but it can influence the structure, the selection of debtors and the level of scrutiny applied to contract terms and payment history.

A review usually needs enough detail to check the receivable properly. That can include contracts, purchase orders, invoices, applications for payment, certificates, evidence of acceptance, retention terms, dispute history and an aged debtor report. The aim is to establish whether the invoices are eligible and how they are likely to be treated if a customer queries payment or delays settlement.

In factoring, the provider normally manages your sales ledger and collects payment from customers. In invoice discounting, your business normally keeps its own credit control, and customers pay into an account controlled by the provider. Discounting generally needs stronger internal controls and reporting.

Each provider sets its own advance rate for each facility, based on its assessment of your customers and ledger. There is no universal figure. The advance applies only to invoices the provider treats as eligible.

Providers typically focus on the creditworthiness of the customers paying your invoices. Your business's own credit profile may therefore carry less weight than it would for a traditional business loan, but it is not ignored. Providers still review your financial position, customer payment history, overdue invoices, customer concentration, disputes, credit notes and contract terms. Expect to be asked for aged debtor and creditor reports, accounts, management accounts and sample customer terms. Exact requirements are provider-specific.

Under factoring, customers will usually know because the provider collects payment. Invoice discounting can be arranged on a confidential basis, but only where the provider agrees, and confidentiality can be withdrawn under the facility terms, for example if the provider needs to collect directly.

Most facilities are with recourse: if an invoice remains unpaid beyond the agreed period, you must repay the advance or the provider deducts it from other funds due to you. Protection against a customer’s insolvency is only included where separately agreed, usually at extra cost and subject to limits.

Many facilities cover the whole ledger. Some providers offer selective or single-invoice arrangements that fund chosen invoices or customers. Whole-ledger facilities and selective facilities are priced and structured differently, so compare like with like.

Compare the service fee and any annual minimum, the discount charge and its reference rate, set-up fees, audit and ancillary charges, minimum usage terms, the minimum contract period and termination fees. The headline advance rate alone does not show the total cost.

Advances are usually settled from your customers’ payments into the collection account. The provider then deducts its charges from the retention and releases the balance to you. Timing of releases depends on the facility terms.

Some providers will fund export invoices or invoices in other currencies, subject to their criteria for overseas customers. Invoice finance does not by itself protect you from exchange rate movements between invoicing and payment; currency risk should be considered separately.

The advance is the invoice multiplied by the advance percentage. The discount charge is the annual rate applied to the chosen basis (the advance or the full invoice) for the days outstanding on a 365-day year. The service fee is a percentage of the invoice. The retention released when your customer pays is the invoice less the advance and charges deducted at settlement. All figures are illustrative.