FAQ
FAQ
Invoice Discounting
Invoice discounting is the ideal way to raise finance for a smaller business which has a few larger debtors.
The financier buys the outstanding invoices at a discount, pays the client immediately and collects payment from the debtors when the invoices are due.
Invoice discounting has the same cash flow effect for the small business as granting a cash settlement discount to its clients.
Invoice discounting in South Africa has been around for many years. It is offered by a small number of specialist financiers. Each financier’s product offering differs from the others. Some are more suitable for small businesses and some for larger businesses. Some financiers prefer certain industries.
Invoice discounting is ideal for small businesses with large debtors. The large debtors usually demand very generous credit terms from its small suppliers. This leads to cash flow problems for small businesses.
Provided that the large debtors are creditworthy, they can be used to raise finance for the small business by discounting (selling) the invoices issued to the large debtors.
The most important advantages of invoice discounting are that it can be implemented quickly and that it can sometimes be the only way for a smaller business to raise finance.
A business’s debtors book is an important asset on its balance sheet which is usually funded by its own capital.
When it runs out of working capital, the small business will experience major cash flow problems and may even be liquidated. Invoice discounting can save a small business from disaster.
Invoice discounting is a more expensive way of raising finance than commercial bank funding, but it may often be the only solution. Invoice discounting should therefore be considered when normal bank funding cannot be obtained.
From a cost perspective, it is comparable to granting a cash settlement discount to debtors.
Susan’s Sweets produces and supplies candy floss to a large retailer, PicFoods. Susan’s Sweets has to pay cash for all supplies needed to make the candy floss, but PicFoods demands credit terms of 30 days after statement.
As the sales of candy floss grow, the amount outstanding from PicFoods also grows. Susan’s Sweets does not have enough working capital to pay cash to its own suppliers anymore.
By discounting its PicFoods invoices to a financier, Susan’s Sweets can raise cash to pay for its supplies. It may even negotiate cash discounts from its suppliers.
Generally speaking, invoice discounting refers to raising finance against a few larger debtors.
Factoring refers to raising finance against the whole debtors book, usually consisting of many smaller debtors.
However, the terms are often used interchangeably. They may also have different meanings in different countries.
Disclosed invoice discounting refers to the debtor being aware that its supplier has discounted its invoice to a financier.
The supplier, debtor and financier work together, so that the debtor’s good credit standing can be used to raise funding for its supplier.
Typically the debtor would verify the validity of the invoice to the financier and would also pay the invoice amount directly to the financier on the due date.
Disclosed invoice discounting is ideal for a smaller business with a few large debtors but lacking an established track record itself. It is therefore ideal for start-up which has been in business for a few months.
Confidential invoice discounting (also called “undisclosed invoice discounting”) refers to a financing transaction where the debtor is unaware that its supplier has discounted the invoice to a financier.
The debtor does not verify the validity of the invoice and also does not pay the invoice amount to the financier, but directly to the supplier.
The financier therefore relies on the supplier to pay the financier when the invoice payment is received. This implies that the financier takes credit risk on the supplier as well as the debtor.
Confidential invoice discounting is suitable for a business with a good track record and solid financial statements but which does not qualify for bank funding.
The product or service must have been delivered or rendered already;
The debtor must be satisfied with the product or service;
The debtor must have a good credit standing; and
The invoice must have been issued.
Debtor finance
Debtor finance is a very wide term and describes a way of raising business finance by using the business’s debtors as security for the financier. It has the same meaning as “invoice finance”.
There are many different methods of debtor finance, such as invoice discounting and factoring, which each also have a variety of sub-categories.
Debtor finance is offered by several specialist financiers and banks in South Africa. It has been around for many years and is a recognised international finance product with many different sub-categories.
Typically, each financier specialises in one or more different types of debtor finance.
Some of the financiers also focus on specific industries, such as mining, manufacturing, transport, construction, retailing etc.
The major benefit of debtor finance is that an asset on the balance sheet which is sometimes overlooked, i.e. the debtors, can be used to raise finance.
This is especially true if banks are not interested in funding the business because they see it as “too risky”. It is a quick and simple method of raising finance when bank facilities are not available or fully utilised.
Debtor finance rates typically vary between about 3% and 7% per month.
In some cases the monthly costs could be lower, but the financier may then charge a collection cost (say 2% of all outstanding debtors) which should also be taken into account when comparing costs.
Sometimes the costs are fixed for a month, e.g. the cost would be 5% irrespective of the actual time it takes before the debtor pays.
In some cases the costs are calculated on the full amount of the invoice and in other cases the costs are calculated only on the portion which is actually advanced to the client.
Sometimes a minimum monthly fee is charged even if no debtors are discounted during that month.
Small businesses which are considering debtor finance should ensure that they understand exactly how and when fees are charged and calculated so that they make an informed decision when comparing different financiers and products with each other.
Invoice Factoring
Invoice factoring is a particular form of invoice finance.
The financier takes the invoices issued by the business to its debtors as security. In invoice factoring, the financier would typically want to see a debtors book made up of many, smaller debtors instead of a few large debtors.
The credit risk would therefore be spread amongst many debtors and the history of managing the debtors book becomes an important factor for the financier.
In many cases, the financier will take over the management of the debtors book on behalf of the business.
In some cases the financier will allow the business to continue managing the debtors, i.e. when the business has a long trading history, a strong balance sheet and a successful collection record.
Invoice factoring is offered by a few specialist financiers and some banks in South Africa. It is a way of raising business finance by factoring business debtors to a financier. Invoice factoring has been available in South Africa for many years.
A small business with cash flow problems can use invoice factoring to convert debtors into cash. Invoice factoring allows the small business to effectively raise money against its debtors.
The business will need a strong debtors book, i.e. a good spread of small debtors or a few large debtors with good credit standings.
In many cases a small business’s working capital is locked up in its debtors. Invoice factoring frees up the working capital and provides cash to the business which will help it to continue growing.
Invoice factoring costs typically vary between about 3% and 7% per month.
In some cases the quoted monthly costs could be lower, but the financier may then charge a collection cost (say 2% of all outstanding debtors) which should also be taken into account when comparing costs.
Sometimes the costs are fixed for a month, e.g. the cost would be 5% irrespective of the actual time it takes before the debtor pays.
In some cases the costs are calculated on the full amount of the invoice and in other cases the costs are calculated only on the portion which is actually advanced to the client.
Sometimes a minimum monthly fee is charged even if no debtors are factored during that month.
Small businesses which are considering invoice factoring should ensure that they understand exactly how and when fees are charged and calculated by potential financiers so that they can make informed decisions.
The major benefit of invoice factoring is that an asset on the balance sheet which is sometimes overlooked, i.e. the debtors, can be used to raise finance.
This is especially true if banks are not interested in funding the business because they see it as “too risky”.
In some cases the business may also want to outsource the management of its debtors book to a professional outfit such as a factoring house. Although this usually is not cheaper than managing the debtors in-house, it may be more efficient.
The business must have debtors.
Credit terms for payment should only be extended to clients of the business after an acceptable process of determining credit risk.
The risk in the debtors book as a whole must be acceptable to the financier.
Factoring
Factoring is a form of business finance provided by specialist financiers. The financier will advance an amount normally expressed as a percentage of the total debtors book, for example 60% of all debtors below 60 days.
In some countries the term “factoring” is also used for invoice discounting, where only certain large debtors are used as security to raise finance.
In invoice discounting a larger percentage, up to 80% or even 90% of the amount outstanding can be financed.
The actual percentage advanced would normally depend on the debtors book, the credit period and the credit risk associated with the debtor.
This depends on the legal structure used to raise finance against a business’s debtors, not the terminology.
If the debtors, or more specifically their obligations to make payment in terms of the invoices, are sold to the financier, it is legally considered to be a sale and purchase and not a loan or a debt.
If the debtors are only used as security for finance, it is legally regarded as debt.
However, these general statements may be overridden by accounting regulations or legislation applicable in a particular country.
Whether or not the financier has recourse to the business if the debtors don’t pay also plays a role in determining how the transaction should be seen.
The legal nature of the transaction may be entirely different from the accounting treatment of that transaction, which may also be different to the tax treatment, e.g. for income tax and VAT purposes.
From a business management perspective, our view is that factoring should be regarded as a way of raising working capital at a certain cost and should therefore be regarded as debt, irrespective of the legal, accounting or tax status of the transaction.
There are probably as many types of factoring available as there are factoring companies, because it seems that almost each factoring house’s product is slightly different from the others.
In South Africa, factoring is usually based on the entire debtors book while invoice discounting is based on certain larger debtors, sometimes even only a few selected invoices.
In some cases the debtors are aware of the factoring, in other cases not.
In some cases the debtors actually co-operate to assist their supplier to raise finance, in other cases not.
Sometimes the financier takes over the management of the debtors on behalf of the client.
The best solution ultimately depends on the products offered by the financier and whether they address the needs of the client.
Doctor Jones recently started a new dental practice. To accommodate some of his patients, he allows them to pay their bills within 30 days from the treatment. However he needs better cash flow to pay his staff, equipment and rental. A factoring house advances 60% of the outstanding debtors book to him.
Builder’s Supplies sells building materials to many smaller builders on credit. To increase the stock to grow the business, Builder’s Supplies need more working capital. By factoring its debtors it can raise more cash, increase its stock and keep growing the business.
Invoice Finance
Invoice finance means u sing a business’s debtors as security to raise finance.
It has the same meaning as “debtors’ finance” and can take many different forms, such as factoring, reverse factoring, disclosed invoice discounting, confidential discounting, non-recourse discounting etc.
Which method of invoice finance would be best for a particular business depends on a wide range of factors, such as the circumstances and needs of the business itself, its debtors, the relationship between the business and its debtors and the requirements of the financier.
Invoice finance is offered by several specialist financiers and banks in South Africa.
Invoice finance itself is a very broad term. Each specialist financier has a slightly different approach to invoice finance and may therefore offer a product which could differ substantially from those offered by other financiers.
A business which needs invoice finance should shop around until it finds an invoice finance product which suits its own circumstances and needs.
A small business often has cash flow problems.
The main cause for the cash flow problems is usually that a small business has to pay its suppliers cash on delivery, while its large clients demand lengthy credit terms. This means that the small business’s working capital is used to fund its debtors. If the small business grows, it will run out of working capital soon.
Invoice finance can be used to convert its debtors into cash. This allows the small business to continue paying its suppliers. If it can’t pay the suppliers, the doors will have to close.
Having a positive cash flow is essential for the growth of any small business.
Any business with debtors on its balance sheet should consider invoice finance. The debtors book is an asset on its balance sheet and could be used as security for raising finance for the business.
It is a quick and simple method of raising finance, especially when bank facilities are not available or fully utilised.
Invoice finance is generally more expensive than normal commercial bank funding. Invoice finance is much more complicated and requires more administration than a bank’s term loan. It is also usually more risky for the financier.
The cost of invoice finance should not be compared to bank funding if that is not available. A better comparison is to ask: what discount would the business give to its debtors for early payment? Such a discount could typically range between 3% and 7% per month.
John’s Trucking is a small business with a variety of debtors. John’s Trucking needs cash to pay for its diesel supplies but the debtors cannot pay earlier.
John approaches a financier who agrees to advance cash in advance, based on the business using the debtors as security. Every month the financier considers the debtors book and pays John’s Trucking an amount of cash in advance. This allows John to pay for his diesel upfront.
Invoice finance is a general term meaning the use of a business’s debtors or invoices as security to raise finance.
Factoring is a particular form of invoice finance. It typically means that the financier considers the whole debtors book as security, instead of particular debtors.
Ideally the financier wants a good spread of debtors, with little concentration risk. The more debtors there are, and the smaller they are, the better.
To limit its own risks, the financier may want to take over the management of the debtors on behalf of the business.
Supplier Finance
Supplier finance is used to resolve cash flow problems in a typical supply chain.
These problems are usually caused by the fact that not all suppliers and buyers in a supply chain are equal.
Some are much larger than others and they can (and do) demand generous credit terms.
Others are so small that they have no bargaining power whatsoever – they are just too happy to be part of the supply chain.
For example, take a small supplier of biltong to a large retail chain.
The biltong supplier has to pay cash for all its meat supplies. It then produces the biltong and supplies the retailer. The retailer demands 30 day credit terms, but the retailer is paid immediately when the biltong is sold to its customers.
In this supply chain, one can say that the retailer has the cash which the biltong supplier needs to pay its meat suppliers.
In theory, the retailer could simply pay the biltong supplier on delivery. Practically this would mean a major deviation from the retailer’s business model. The retailer would simply not do it.
The supplier’s cash flow problem becomes much larger when the retailer increases its orders for more biltong if the sales are good. The biltong supplier has to find even more cash to pay its meat suppliers, while the amount owed by the retailer increases proportionately.
The anomaly which arises is that if the biltong tastes great, the retailer’s customers buy more biltong, the retailer therefore orders more biltong, the biltong supplier has to order more meat for which it has to pay cash to its own meat suppliers – but while the retailer’s cash position improves, the biltong supplier’s cash flow suffers because its business grows!
To resolve this problem, the retailer could assist its small suppliers, like the biltong producer, by arranging with a financier to inject supplier finance into the system.
There are many ways to do this, but typically the retailer would confirm to the financier once its supplier invoices are approved for payment. The financier would then offer finance against the discounting of those invoices to the suppliers.
Supplier finance is still small in South Africa, but it is a growing trend worldwide.
Currently there are only a few financiers offering supplier finance in South Africa. In view of BEE procurement principles and regulations one would have expected a much faster trend in the direction of supplier finance already.
Hopefully more and more large corporates will become aware of supplier finance and the benefits it can provide to its small suppliers, which will ultimately also benefit the corporates themselves.
Reverse factoring is simply another term for supplier finance. It is usually initiated by the buyer of the products or services, rather than the supplier.
Property Finance
A secured business loan is a loan to a business which is secured by a mortgage bond over a property.
A secured business loan is a loan to a business (not an individual) where your house is used as security for the loan. CapX will register a bond over your property to secure the loan. The loan can be used to fund a cash injection for your business.
CapX offers business loans against paid up properties in SA, as well as in Namibia. If you own a fully, or nearly fully paid up property in SA or Namibia, CapX can offer a loan to your business for up to 40% of the value of the property. This loan can be used to purchase stock, expand the business or solve cash flow problems.
An asset backed loan is a loan secured by your assets. CapX can use your bond free property (asset) as security, by registering a bond over the property. This loan is only applicable to business entities. It can be used for various purposes to keep your business afloat in difficult economic times.
Should you need funds for your business for whatever reason and the conventional bank loans do not apply to your situation, CapX can assist if you own an unbonded property. Only business entities may apply, we unfortunately cannot lend to individuals. If the value of your property is more than R650 000, your business can apply for a loan for up to 40% of the value of the property. This offers you the option of not having to sell your most prized asset in order to save your business.
If your business is in need of funds and you have exhausted all your options, CapX can use a paid up property to offer you a loan in order to assist your business. CapX will register a bond over the property and within 12 months, once the loan is repaid, the bond will be cancelled in order for you to have a bond free property again. It is a medium term solution in order to keep your business going in difficult times. Interest will be paid monthly and an acceptable exit strategy will settle the capital at the end of the loan term.
CapX looks for an asset in the form of a paid up property to offer you a secured loan. If you own a bond free property valued at more than R650 000, we can assist with a loan to your business. A bond will be registered over your property to the value of the loan. The property stays registered in your name. The loan period is from 6 months to 12 months. Should you prefer to settle the loan after 6 months, you are free to do so without any penalties. This is an easy way to keep your business “in business” without having to sell your property.
If your business is faltering due to cash flow problems and you have tried unsuccessfully to get assistance from other financial institutions, CapX might be able to assist you if you are a title deed holder to a property. We use your paid up property as security by registering a mortgage bond over the property. This will free up some cash to get your business profitable again.
Is your business in trouble, your funds depleted and the only option is to sell your property? Hold on! CapX can come to your assistance. We use your property as security for a loan to your business by registering a bond over the property. It is a short term solution to keep your business going until you are back on your feet again.
If you need to stock up your products or experience temporary cash flow problems in your business and you have tried unsuccessfully to obtain funds, your bond free property can come to the rescue. CapX can offer you a loan against the value of your property. A first bond in our favour is registered over your property. This loan offers you the opportunity to fund your business.
Are you finding it almost impossible to get a loan for your business, because you don’t have a regular income? Your paid up property can be the solution to this problem. CapX will find a tailor made solution by using your property to free up funds for your business.
Your paid up property can serve as security for a loan to your business. CapX will fund your business by registering a first bond over your property and once the loan is settled, the bond will be cancelled.
If you are a property owner and your property is paid up, we can use the property as security for a business loan. A loan for up to 40% of the value of your property will be considered, allowing you to expand, buy products, machinery or help you out with cash flow problems. This is an easy solution to prevent your business coming to a standstill in cash strapped situations.
By using your paid up property as collateral, CapX can offer you a loan to assist your business. A bond will be registered over the property in our favour and release funds to your business. It is a short term solution to your business, without having to sell your property.
Yes indeed. CapX will consider lending you money against the security of your bond free property by registering a bond over the property as security. If you are expecting funds in the near future in any form e.g. a contract payment, sale of your property, policy pay out, etc., but need the funds sooner, this is the ideal solution to your problem.
Owning a fully paid up house can come to your rescue if your business needs a cash injection. Most of our clients find it almost impossible to get loans for their businesses, often causing businesses to close down due to cash flow problems. CapX might have the solution to your problem by offering your business a loan. We secure a loan against your property in order to fund your business.
South African business owners often find it difficult to get loans for their businesses. The reason being that the business might still be fairly new, or there is not a regular income, or perhaps the business is not showing a profit yet, or there is an overdue account or a small judgement against the owner or the business. CapX is willing to assist by using the security of a property over which a bond will be registered in order to help business owners in SA.
A medium term business loan is ideal for a business which is expecting funds in the near future, but is in need of the funds earlier. For instance, a property is in the market, but no offers have been received yet. The business is in dire need for funds and cannot wait until the property is sold. Another example: Expecting funds from a contract or tender, but there is no current funds to start on this project. CapX can use your paid up property to secure a loan for your business for a term of 12 months.
Are you expecting incoming payments for your business, but not soon enough to keep your business afloat? Should you own a bond free property, CapX can assist you. We use the collateral from your property to lend you money for your business. When you receive the expected funds, the loan can be repaid.
Business Finance
Cash flow Solutions
Many businesses experience cash flow problems, for a variety of reasons.
These reasons may include exceptional growth, inadequate working capital, clients demanding extended credit terms, clients not paying at all, inadequate cash flow management, too much working capital locked up in stock etc – usually a combination of these factors.
Cash flow solutions include any solutions to resolve these problems – effectively better cash flow management and using available cash resources as best as possible.
Strangely, many small business owners are not prepared for handling cash flow problems, which will arise in any new business – sometimes even in an established business.
Cash is King – always and forever! Cash flow problems cause the downfall of the majority of failed new businesses.
To identify the problems is fairly easy – to resolve them is usually more difficult.
Firstly the business owner or financial manager should identify the reasons for the cash flow problems.
Sometimes they are not easy to recognise. It is advisable to bring in an accountant or external business advisor to assist in this process.
Once the reasons for the cash flow problems have been identified and considered, one should look for ways to resolve the problems.
Sometimes the solutions are obvious: stricter credit procedures, reducing stock, demanding credit from suppliers, retrenching staff if appropriate, moving to smaller and cheaper premises, cutting other unnecessary costs, encouraging clients to pay cash by offering a cash discount or converting debtors to cash by invoice discounting or factoring.
If the solutions are not fairly obvious, there may be an inherent problem with the business model, i.e. it simply cannot work unless significant changes are implemented.
An experienced professional advisor should be consulted to assist; otherwise financial ruin will most likely be the result of the cash flow problems.
Our advice is to act quickly and decisively by following the advice of your professional advisor before it is too late.
The cash flow solutions available to small businesses are essentially the same as for any large business.
These include stricter credit procedures, reducing stock, demanding credit from suppliers, retrenching staff if appropriate, moving to smaller and cheaper premises, cutting other unnecessary costs, encouraging clients to pay cash by offering a cash discount and converting debtors to cash by invoice discounting or factoring.
Large businesses employ accountants and other financial staff to manage cash flow – they know that a good cash flow is the life-blood of every business and their job is keep the business running by keeping cash flow healthy.
The problem for a smaller business is that it cannot afford to employ experienced and expensive personnel just to manage cash flow.
This means that the small business owner/entrepreneur must have a very thorough understanding of cash flow management, how cash flow problems arise and how to resolve cash flow problems.
The best advice we have for any entrepreneur is to read and learn as much as possible about good cash flow management before starting a new business!