Mechanical contractors invoice finance for staged works and disputed valuations

Not automatically. In mechanical contracting, a payment application or valuation is not the same thing as an enforceable debt unless the contract terms and the payment process have moved it into a due receivable. A provider will usually want to see whether certification has happened, whether notices have been issued and whether the amount is free from dispute or retention. If the item is still work in progress or is under review, it may not qualify in the same way as an undisputed invoice.

Retentions can reduce the amount that is available because the withheld sum is often treated separately from the main invoice. Even if the rest of the invoice is eligible, the retention may not be funded on the same basis, or it may need a different review. The key issue is whether the retained amount is due now or only at a later contractual stage. That depends on the contract documents and the status of the works, not on assumptions about cash flow.

Neither is universally better. Factoring normally includes collections, so it can help if you want the provider involved in debtor chasing. Discounting normally leaves credit control with your business, which may suit firms that want to maintain direct contact with clients and main contractors. The better fit depends on how your projects are billed, how much control you want over customer communication and how disputes are usually handled.

The debtor’s credit quality is important, but it is only one part of the review. A provider will also look at whether the invoice is valid, whether there are disputes or set-off risks, how concentrated your ledger is and whether the contract terms support prompt payment. Business and public-sector payers are generally assessed differently from individual self-funders, and the paperwork behind the debt matters as much as the name of the customer.

It can only do so if the provider is comfortable that the amount is eligible, and often the retention or disputed element is treated separately or excluded. Work that is disputed, uncertified or still subject to contractual adjustment is not automatically suitable. That is why mechanical contractors need a detailed review of each invoice, application and contract before assuming funding will be available.

Prepare your debtor list, sample invoices, contract terms, payment application process, certification paperwork and any records showing retentions, disputes or set-off issues. It also helps to explain whether you mainly serve commercial clients, public-sector bodies or a mix of payers, because eligibility can differ by debtor type. OCE can then help compare invoice finance structures, but the final assessment will depend on the receivables and the provider’s review of the documents.

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.