What Securities are needed for an Invoice Factoring Agreement?

A huge advantage to invoice factoring is the fact that no fixed assets are needed as security. In the vast majority of cases, the invoice alone will be all the security that is required. This is why the popularity of invoice factoring is still very much on the rise.

This often makes invoice factoring a much-preferred choice when being compared with other finance options; the lack of fixed assets being required as security is appealing to small business owners.

This means that physical assets such as machinery, vehicles and houses will never be required for invoice factoring.

How is invoice factoring secured?

Invoice factoring is secured via the credit worthiness of the the business that you are trading with, and the value of the invoice issued.

ƒMost financial products come as secured or unsecured, invoice factoring is no different. Invoice factoring is secured via a debenture if you are a limited company, if you have taken out an invoice factoring facility as a sole trader a personal guarantee is required.

What type of invoices are acceptable?

As we have mentioned before, the invoice itself works as security, though each factor will have its own applicable criteria. Typically speaking, all invoices have to:

• Be raised on credit terms
• Be agreed as payable
• Be sent to a business customer
• Be raised in arrears of the goods and service delivery

Will Invoice Factoring agreements require additional security? 

When you are choosing a provider, you should carefully study the small print, as all security of factor request is sure to be slightly different.

You may find that certain invoice factors will insist on an all-asset debenture over your business. Therefore, if the company were to be wound up in the future, any repayment to the factor would be paid as a priority. Other factors may request that any other lenders waive their security over book debts.

You may also be faced with an agreement that requires you to provide a personal guarantee or warranty, which is something you really should consider with a high level of care. If you company becomes insolvent in the future, your possessions could be at risk in this sort of situation.

Personal guarantees & warranties within invoice factoring agreements

Factoring providers may request a personal guarantee, or request a warranty from applicants as a gesture of good faith. This will give the provider certain assurances and allow them to remain confident throughout the process. If the business in question has a history of financial failures, the company funds are worryingly low, or the directors have experienced previous insolvency, this will become even more likely.

Personal guarantees become very rigid very quickly. If the business was to default, you would be required to repay the remaining sum personally, which is never a good position to be in.

In cases where personal guarantees are not an option, providers may request a warranty that entitles the factor to enforce a personal guarantee if there is ever a breach of the agreement. In certain situations, it can be very difficult to escape this reality.

In order to recover cash that is under warranty, the provider would have to take the case to court. This is why they often prefer to insert the personal guarantee right from the get-go if they are able to.

Other security will not normally be required 

The reason we have provided you with information about both personal guarantees and warranties is because certain factoring providers may request these things as security from you; it is highly important that you become fully aware of what you are signing up for before you make any finalised agreements.

Generally speaking, you should never need to provide any forms of security beyond the invoice itself. Be sure to weigh up your options when searching for invoice factoring opportunities and read up on all of the finer details that may not have made themselves apparent at first glance.

Conclusion

In the United Kingdom, securities play a crucial role in an Invoice Factoring Agreement, providing assurance and protection for both the factor and the business seeking financing. Several securities are typically required to ensure a strong and reliable agreement. Firstly, the main security in an invoice factoring agreement is the accounts receivable themselves. These outstanding invoices act as collateral, assuring the factor of repayment.

Additionally, personal guarantees from the business owners or directors may be requested, making them personally liable for any outstanding debts. In the UK, a debenture is often used as a security instrument, granting the factor a fixed charge over the company’s assets, such as property, equipment, and stock.

This fixed charge ensures priority for the factor in the event of default or insolvency. By incorporating these securities into the agreement, both the factor and the business can have confidence in a mutually beneficial and secure partnership.