Invoice Discounting Agreements: The Essential Guide for Insolvency Practitioners and Administrators
Invoice discounting is a simple solution for businesses that need a cash flow boost, but want to stay in control of their sales ledger and hide the fact from their customers that they have an invoice discounting facility. This type of finance frequently complements more traditional lending that businesses already have in place, such as overdrafts or business loans.
The invoice discounting process typically involves the business notifying the discounting company once an invoice has been raised. This is always done at the earliest opportunity. Once the discounting company receives a copy of the invoice, it makes an advance to the business. Once the customer pays the invoice, the full amount is deposited into a bank account that is controlled by the discounting company. It then pays the balance of the invoice to the business, minus any charges.
There are variations on the discounting theme, such as a ‘facultative facility’ that enables the discounting company to buy specific invoices. In contrast, a ‘whole turnover facility’ buys the full amount of the accounts receivable. However, some types of debt can still be excluded in this type of agreement.
The discounting company is normally assigned the business’s trade debts. However, the terms of the agreement may cover other receivables, such as insurance claims, refunds, compensation claims, etc. If these are not specified in the terms of agreement, they may be found in the factoring company’s debenture or floating charge security.
Another point about debentures is that if one was in place prior to the discounting transaction, the factoring company will have needed to contact the finance provider involved for a debenture waiver to cover the relevant receivables.
Related Rights Vested in the Discounting Company
Under the terms of the agreement, the discounting company buys the debts of the business as well as the related rights. In doing so, the discounting company can continue to collect the assigned debt even if the relationship with the business goes pear-shaped. Related rights also cover the right to piggyback a winding up petition in order to collect the assigned debt.
Related rights also encompasses stock. In this case, when stock belonging to a specific customer order (assigned debt) has been returned, the discounting company has the right to sell it. The proceeds of the sale are applied to the debt relating to the stock.
Once a business is insolvent and has defaulted on the terms of the agreement, the discounting company has the right to charge additional fees for the added time and risk that may be involved in recovering the debt. These fees can range from 2% to 10% of the assigned debt. However, most discounting companies are willing to negotiate with the IP or administrator. When the charges seem excessive and an agreement cannot be reached, the IP or administrator should seek legal advice.
Most discounting agreements do not terminate just because the company becomes insolvent. Therefore, the debts created by the business will continue to vest in the discounter automatically. The business may have to give notice to terminate the agreement.
It is also worth remembering that a potential buyer can purchase the assigned debt of the business that belongs to the discounting company through a sale managed by the discounting company. This is typically done using a deed of assignment from the discounting company. Alternatively, the discounting company can be made party to the sale and purchase agreement for the sole purpose of transferring the debts to the buyer.
If you would like to know more about invoice discounting agreements, please call Mike 07912 344 394 or email [email protected] for free and confidential advice from one of our professional advisers.