Five ways to actively review invoice discounting facilities

The coronavirus pandemic has resulted in significant reductions in revenue. This presents a significant problem for businesses that are funded by invoice discounting.

If you’re operating an invoice discounting facility, here are five actions you may want to consider.

    Review customer funding limits

Lenders may review and amend funding limits against your individual customers. If debtors stop paying but you continue to invoice the customer, you could go over your funding limit. This would result in your lender increasing your retention reserve, resulting in a reduced availability of cash.

Key questions to answer include:

  • Can you predict which customers that might affect?
  • Can you negotiate discounts for early payment?
  • Have you reviewed funding limits and requested increases where necessary?
    Review credit protection limits

In our experience, businesses may not be consistently reviewing protected limits for their top 10 customers. Trading above these limits is a risk to the business in the event of a customer failing to pay, or an insolvency event.

Now is the time to consider an increase in your current limits, or consider new limits from your provider, taking account of the potential for debtor days to lengthen due to slowed customer payments. The overall balance with any one customer may soon exceed your protected or insured limit.

Doing any of the following could prevent claims from being paid by your provider:

  • Trading beyond or extending individual customer credit terms without prior approval.
  • Not reporting overdue debts as per the policy conditions.
  • Not notifying your lender, credit insurer or broker in respect of any potential repayment plans.
    Reassess your customer concentration levels

Reduced levels of revenue from other customers may mean you breach a key debtor concentration cap earlier. So, reforecast revenue by customer and speak to your lender to see if there is some flexibility.

Key questions to answer include:

  • Your customer concentration may be funded to an appropriate level via a cap (a defined percentage of your overall debtors or a maximum funding figure), but are the debts protected at this level?
  • What would the business do if the customer couldn’t pay?
  • What is the contingency plan if more than one customer can’t pay?
    Advise your lender and credit protection provider about changes to payment terms

If you have extended your payment terms with key customers as a result of coronavirus, inform your funder to avoid a breach or reduced funding. Their funding terms and covenants may be derived from the terms you trade under.

Also speak with your credit protection provider to ensure that you conform with their policy conditions.

    Run some sensitivity analysis

This is a time of unprecedented uncertainty, when it’s difficult to know what the short, medium, or long-term future might look like. That makes sensitivity planning more important than ever. Understand how you might respond to any given turn of events.

Key questions to answer include:

  • What if customers delay payments?
  • What if a top customer defaults on their payments?
  • What if you only receive 50 per cent of payments from your top 10 customers?
  • What industries are you exposed to and how have they been impacted by Covid-19?

We can help

Our experienced advisers can help you with all of the issues mentioned above. And if invoice discounting no longer provides you with sufficient funding, we can help you consider and secure other sources of available funding.

Options may include leveraging other assets on the balance sheet with asset based lenders and debt funds, or reviewing your eligibility for the Coronavirus Business Interruption Loan Scheme.

For more information on the above, please contact

Chris Hardy Chris Hardy

Partner

MarkGandy Mark Gandy

Associate Director