Could invoice finance be right for your business? To find out, here’s two questions to ask yourself:
- Does your business supply goods or services on credit terms to other businesses?
- Do you need additional working capital?
If the answer to these questions is “yes”, it is very likely that there will be an invoice finance product available to you.
Whilst Invoice Factoring has been around for over 100 years, a change in case law (Brumark Investments Limited 2001) affected the ability of banks to obtain a fixed charge on book debts in traditional overdraft situations; this has meant that invoice finance has grown significantly over the past decade, both in terms of the numbers of users and in the numbers of products available in the market place.
Why invoice finance?
The benefit of these types of facilities is that the funding is linked directly to your sales ledger and therefore grows and shrinks with you as your business experiences peaks and troughs through seasonality or market changes.
Why not invoice finance?
Well, there are two main issues:
- If you are using factoring the facility will be disclosed to your customer. You may not want this to be the case.
- The other main reason that some businesses don’t want to use Factoring is that collections are handled by the Factor. It’s very important to know who will be handling your credit control before signing up to these facilities.
Invoice finance and business sectors
Invoice finance is commonly best suited to the folowing types of business:
- Manufacturers
- Business service providers
- Wholesalers
- Recruitment agencies
- Distributors
- Printers
- Transport
You will note that all of the above have a very straightforward business model, with finished goods or services being provided, approved and then invoiced for. This methodology gives the invoice finance provider a great deal of comfort should the worst happen and they have to collect in the debt themselves.
However, it is worth mentioning that as the invoice finance industry has developed over the past decade, new products have been developed to fund other, more contractual types of debt, such as construction, IT, and even football transfers.
Margins
The business considering invoice finance should ideally have a gross margin in excess of 20%. Operations with very thin margins can see their profitability significantly eroded by invoice finance charges.
Business phase
As for industry sectors, invoice finance is arguably better suited to businesses at particular stages in their growth cycle:
- Established businesses – Invoice finance is ideally suited to well-structured growth orientated businesses, with the inbuilt flexibility providing for increased working capital as sales increase.
- Start ups – It is now possible to fund working capital for a start up business with invoice finance. The seed capital required to set up the new business up will still need to found from other sources.
- Stressed businesses – Businesses that may be experiencing operational and/or cash flow problems, often following an event beyond their control – such as a bad debt from a major customer, or a sudden change in their market resulting in a loss of business – are, in many cases, still able to find an invoice finance provider who will work with them to get the business back on an even keel.
- Distressed businesses – Businesses that are under severe pressure, perhaps as a result of HMRC arrears, or banks reducing their facilities, are still able to obtain invoice finance in the right circumstances. There are a number of providers who will support a well planned turnaround strategy.
- Business reconstructions – If the turnaround strategy includes some form of insolvency mechanism, there are again a number of providers that will support the overall plan, and potentially fund both “oldco” and the “newco”.
In summary
Invoice finance can prove to be an excellent business finance solution in a wide range of business sectors, and can provide much needed cash flow in situations from start ups through to growth, and even on to those firms in a turnaround or recovery phase.
I would stress, it is vitally important that you get the right type of facility and that you choose the right provider.
INSIDER TIPS
- Do your research – consult someone who understands the market
- Consider all the options – for example, you may not want to finance all your invoices
- Meet the people – introduce yourself to the people who will be running your account
- Don’t overestimate your turnover – your charges will be linked to this
- Don’t be afraid to ask for help and advice…..
If you have any comments on this article or would like to discuss invoice finance and whether it could be right for your business please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
Image by: elycefeliz