1. What is receivables-based finance?
   
   
2. What is invoice discounting?
   
   
3. What is factoring?
   
   
4. What are the advantages of receivables finance?
   
   
5. Will my customers be aware of the arrangement?
   
   
6. For how long will each invoice be funded?
   
   
7. How will I know how much finance is available to me at any given time?
   
   
8. What security do I need to provide?
   
   
9. What are the costs involved?
   
   
10. Will availing of the services from Enterprise Finance Europe prevent me from having other types of financing?
    
    
11. What is overtrading?
    
    
12. What does the Brumark case refer to and what are the implications for SME's?
    
    
13. What does Basel II refer to and what are the implications for SME's?
    
    
14. What are trade bills?
    
    
15. What is a bill of exchange?

What is receivables-based finance?

Receivables based finance is a flexible revolving credit facility aimed at supporting your finance needs, whether through a period of growth, acquisition, consolidation or recovery, without the burden of loan repayments. It fundamentally works on the basis of converting trade debts into cash by presenting funds at a pre-agreed percentage, typically 75-90 % of gross invoice value, against eligible debts. The finance becomes available to you on the day that the invoice is raised, providing cash for your business immediately rather than having to wait until your customer pays the invoice in question. It is a flexible, dynamic form of funding which increases in line with your business growth, enabling you to avail of new business opportunities.

What is invoice discounting?

Invoice discounting is a method of raising working capital finance by converting trade debts into cash. It turns your company's debts into cash and by doing so, facilitates further growth and improved cash flow management. Most importantly, invoice discounting is confidential. For further information on invoice discounting, click here (link to OS2ai)

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What is factoring?

Factoring also provides funding against your debtors and combines sales ledger management services. Enterprise Finance Europe will perform all credit control for you using expert collections software and a team of professional credit controllers. We will work in partnership with you to agree credit control procedures aimed at ensuring your debtors adhere to agreed credit terms. For further information on factoring, click here (link to OS2bi)

What are the advantages of receivables finance?

Receivables finance offers many advantages over bank overdrafts and term loans. It can provide higher finance capability and more flexibility than a bank overdraft. It also offers a revolving facility, which doesn't need to be constantly renegotiated. The benefits of receivables finance can also exceed those of a term loan for growing companies as there is no repayment structure. The finance is only repayable on the funds in use by the business and it offers higher advance levels.

Will my customers be aware of the arrangement?

Your customers have no knowledge of the arrangement and all contact continues to be with your business rather than with us when you avail of confidential invoice discounting. You remain responsible for all aspects of sales ledger control, and your relationship with your customers is not affected.

For how long will each invoice be funded?

Your invoices will normally be funded for a period of up to 120 days from invoice date and you can protect your business against non-payment and bad debts by taking out a credit insurance policy.

How will I know how much finance is available to me at any given time?

To find out how much finance is available to you at any given time log on to the Enterprise Finance Europe online management account system. To do this, start at www.efeurope.com, select EFE Online from the menu on the left hand side and enter the site with your user id and password. Our website provides you with up to the minute information and allows you to securely transmit messages and requests to us and us to you, at times of the day convenient for you. To find out more about EFE Online click here (link to EO1). Alternatively you can contact us during office hours, by telephone 0845 6080880 or by fax 028 9024 6406.

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What security do I need to provide?

Security requirements from Enterprise Finance Europe are very straightforward. Generally, we require a confidential Debt Purchase Agreement to be signed, together with ancillary documents. As with all such documents, you should obtain independent legal advice before completing them.

What are the costs involved?

You will find that Enterprise Finance Europe's charges are very competitive. There are two components; a discount charge levied on funds advanced and a service charge. As we will work to structure each deal according to the specific needs of each and every client, fee structures will also be negotiated on an individual basis. However, as a basis indication, for invoice discounting, the discount rate will tend to range from between 1.5% and 2.5%, with a service charge of between 0.05% and 0.5%. For factoring, the discount rate will tend to range from between 2% and 3%, with a service charge of between 0.3% and 1.5%.

Will availing of the services from Enterprise Finance Europe prevent me from having other types of financing?

No, you will be able to make use of other types of financing alongside any working capital finance facility. It is always prudent to match the right sort of funding to the underlying asset in question.

What is overtrading?

Overtrading occurs when a business is growing its sales levels without the appropriate working capital funding in place to match increased costs e.g. relying on a static overdraft facility. A company can easily find itself in a situation where its sales levels have grown considerably, yet it is unable to meet supplier demands for payment.

Some of the symptoms exhibited by a company that has insufficient funding: · A reliance on overdraft increases · Requirement for a permanent overdraft · Excesses become a feature · Last minute funding needs become common · Management spends its time chasing outstanding debts · Late payment of bills.

Obviously, overtrading is not necessarily an indication of a bad business strategy but merely an incidence of insufficient funding. In response to this, Enterprise Finance Europe can tailor a funding package based on your current sales levels so that these symptoms do not hinder your company's growth.

What does the Brumark case refer to and what are the implications for SME's?

In June 2001 the judgment in the Brumark Investments Limited case overturned previous rulings concerning fixed and floating charges. Earlier legislation meant that if a bank had a fixed and floating charge over debtors they would automatically take priority over preferential creditors such as the Inland Revenue and Customs and Excise. The New Zealand Privy Council in the Brumark case decided that the company's right to collect debts and to use the proceeds of the book debts constituted only a floating charge, and therefore gave preferential creditors priority over the charge holder.

To create a fixed charge over the book debts the lender would need to demonstrate that they control both the collection of the debts and the use of proceeds, and can insist that proceeds are paid into an account under their control.

Factors and Discounters can clearly demonstrate control of the debtor asset by virtue of the fact that they take assignment of the book debt, and are therefore not affected by the Brumark ruling. The case is not yet binding on the English courts but is persuasive, as New Zealand legislation is not dissimilar to England and Wales. The implications are that banks are now seeking additional security to support lending, or alternatively encouraging clients to seek factoring/discounting facilities, usually with the bank's factoring company.

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What does the BASEL II refer to and what are the implications for SME's?

The new capital accord published by the Basel Committee in January 2001 builds on the June 1999 consultative package, which aimed to refine the 1988 Accord.

As a background, the intention of the 1988 Accord was to ensure an adequate level of capital in the international banking system and create a more level playing field, so banks could no longer build business volumes without adequate capital backing.

It has subsequently been decided that these existing measures are outdated and fail to align the level of regulatory capital with the economic risk undertaken by the institutions. It also fails to sufficiently recognise credit risk mitigation techniques, such as collateral and guarantees. It was decided that a more risk sensitive framework with more complex associated measurement techniques was needed, one that reflected the changing dynamics of financial markets and new instruments.

As a result, a new, more risk sensitive methodology of calculating capital adequacy requirements will be implemented. The focus will place more emphasis on a bank's own internal methodologies, including supervisory reviews, market discipline, flexibility and will provide a menu of approaches. The new Accord will encourage banks to invest in more risk sensitive models, providing incentives for banks to undertake better risk management.

The first standard approach uses external credit risk assessments for risk weighting assets. The concern for the banks is that the risk weights are to be refined by reference to a rating provided by an external credit assessment institution, such as a rating agency, which meets strict standards. For corporate lending, the existing Accord provides only one risk-weight category of 100 percent. The new Accord will provide four categories: 20 per cent, 50 per cent, 100 per cent and 150 per cent.

The second is an internal ratings-based approach using internal risk assessments for risk weighting assets. It calculates capital adequacy by combining various factors to determine a risk weighting for each class of exposure. If the banks have a sufficiently developed internal capital allocation process, they will be permitted to supply the necessary inputs. Under the internal method the capital requirements could reduce. However calculating the risk on assets, which you do not have day-to-day involvement or knowledge of, is very difficult to prove especially in the corporate sector.

Banks who do not believe it is a worthwhile investment, to change their internal systems to be able to monitor working capital facilities to this level, will need to find an alternative to avoid an increase in capital requirements. The alternative is to use the receivables market where the discounter has day to day knowledge of the assets being funded and can quantify the risk on both the client and debtors.

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What are trade bills?

A trade bill is a bill of exchange drawn by one trader on another. It represents an international, legally binding commitment on the part of a trader, usually the 'buyer,' to pay at some fixed future date a fixed sum of money, for goods or services received, in transit or being processed.

This commitment becomes a negotiable instrument, against which finance providers are willing to provide funds upfront, i.e. discount the trade bill for an agreed charge.

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What is a bill of exchange?

As defined by the Bill of Exchange Act 1882, a bill of exchange is:

"An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed, to pay on demand or at a fixed future time a certain sum of money to, or to the order of, a specified person or to the bearer."

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