Almost every time we visit a new prospective factoring client, they tell us that they want a confidential or undisclosed factoring facility. This is for a number of understandable reasons, such as:

• they would prefer not to have a business finance company contacting their customers

• they don’t want the customers knowing their business

• they fear that their customers will think that they are in financial difficulty.

 An undisclosed factoring facility has the following features:

• your customers don’t know you are factoring, and are simply advised of a new bank account to pay into

• you are responsible for chasing payments and sending out statements

• invoices presented to your factoring provider for funding are not verified by the factoring company.

 A disclosed factoring facility is also called full service factoring, and has the following features:

• your customers are aware of your factoring facility and understand that they are paying into a bank account held by your finance company

• your funder chases payments, investigates discrepancies, and sends out statements for you

• your funder will contact your customers from time to time to verify invoices that you require funding against.

 There are a number of reasons why a disclosed factoring facility can be better than a confidential facility.

Your funder does the work for you

Small businesses are often stretched for resources, and often it is the business owner who is raising invoices and doing the bookkeeping. Something that is often neglected (because there’s no time and it is an ugly job) is chasing payments. With a full-service disclosed factoring facility, your funder chases payment for you and sends out monthly statements to your customers. Not only this, but they will also follow up on payment anomalies, for example when a payment doesn’t match invoice totals.

Your customers may also benefit from factoring

Ever wonder why your customers are slow to pay? Maybe they are also having cashflow difficulties! You could be introducing them to a whole new world of business finance. If they also had a factoring facility, maybe they would be paying your invoices quicker! Your funder might also let you lead the “management of the message” with your customers. In fact, this can make the setup of your facility take less time.

Risk management for you and your finance company

Undisclosed factoring facilities are higher risk from the perspective of your business finance company. An important tactic for managing risk is ensuring the factorability of invoices presented to us for funding. Factorability refers to the likelihood of an invoice you have had funded being paid in full by your customer. Many things can affect factorability, for example goods not arriving in the state in which they were promised, terms of a contract not being adhered to, or a customer deciding that services provided did not meet the required criteria. In these cases, the customer is likely to dispute an invoice and refuse to pay it. The verifying of occasional invoices by your factoring finance company improves their knowledge of the factorability of an invoice and gives greater confidence that the invoice will be paid. It reduces risk for both you and your funder: imagine if you received funding for a large invoice and then the customer refused to pay it. You would have to pay that invoice back to your finance company.

It helps to combat negative perceptions of factoring

The more out in the open it is, and the more businesses that are factoring or using invoice finance to improve their cash flow, the more normal it becomes. Overseas, factoring and invoice finance is a well-established and widely accepted form of funding for small and medium-sized businesses. Why not here?

So even after knowing all of this what if you still want an undisclosed factoring facility?

Here are the usual criteria that you normally need to meet, to be considered for undisclosed factoring:

• large turnover, possibly over $2million

• a good spread of debtors - often meaning factoring your whole debtors ledger

• your profit and loss statement must show you are profitable

• your balance sheet must show positive shareholder funds

• usually your funder must be able to hold a full first ranking GSA – if your bank has a GSA in front of them, they may need to rank ahead of them

• your PAYE, GST, and annual income returns must all be up to date.

This article is not intended to be financial advice. You should always seek the advice of an independent adviser prior to agreeing to any business funding.