July 22, 2019

Using invoice finance for cashflow

“Invoice finance is a very sensible option for a business to improve liquidity. The cost of this liquidity can be offset against savings and efficiencies that technology such as the FitekIN accounts payable solution can deliver” — Mark Baterip, UK sales Manager Fitek.

Working capital is an absolute necessity for startups, rapidly growing businesses, or larger organisations looking to expand through acquisition.

But cashflow can be vulnerable to outside pressures, such as late-paying customers or suppliers pressing for payment. Invoice finance releases capital, advancing typically 85 per cent of the value of outstanding invoices, turning it into liquid cash.

Some invoice finance companies, such as Independent Growth Finance (IGF), also provide working capital against inventory and stock held in the business.

Its asset-based lending director Richard Spielbichler says: “In an ideal world every- one would pay promptly. Invoice financing bridges the payment cycle gap by granting working capital flexibility that can handle slow payments, without damage to business.

“It also allows suppliers to grant longer credit terms to its customers without putting themselves at risk or facing a shortage of liquid assets. Large customers in particular will look for extended credit terms, as the value will be on a much bigger scale.”

Doncaster’s SES Holdings Group secured £7.5m in funding from IGF in March to support a restructure. That included a £2.5m invoice discounting facility for the rail and civil engineering company and £5m for TEi Ltd, its engineering, manufacturing and installation subsidiary.

When another trading subsidiary had experienced cashflow difficulties the decision was made to dismantle the group.

Dave Hyland, managing director at SES, says: “We very quickly came to the end of our journey with our existing provider of invoice discounting finance. Despite being a successful group turning over £40m to £50m every year, when we needed their flexibility the most, they could not provide the service we needed. Inevitably we went on the search for a new financier.

“We needed a funder who offered us not only quick and flexible funding, but more importantly a partnership. IGF listened
to our ambitions and challenges and understood the urgent need to completely restructure our finance. They promised a timely transition and funding certainty and absolutely delivered on it.”

A request for prompt deal turnaround might actually raise suspicions for providers says John Gribbon, regional director at Secure Trust Bank Commercial Finance. “It is disappointing when you get one that needs the money tomorrow. It shows that something has gone substantially wrong and they haven’t planned very well. You might sometimes get a set of circumstances where something has arisen or they have an opportunity to buy stock at short notice and it helps them to move it along quickly.”

The best way to get funding sorted with speed is to have a clear business plan and funding requirement. This allows the proposal to be understood and a decision reached quickly.

Invoice finance is a good product if managed correctly – by the client as well as by the factor which is collecting the debt, says Gribbon.

“You’ll see admin and processes in businesses that aren’t as strong as they could be. A good invoice finance business can help clients with their process, particularly sales ledger and credit control management.

“If it hasn’t got a strong credit controller, businesses will benefit from what a factor brings in terms of daily and weekly procedures – the willingness of the factor to phone debtors and chase money. I have known businesses who are scared of chasing what was owed to them. Some of the cannier people hide a little bit behind the factor saying ‘I didn’t want to involve them, sorry’. Invoice finance is a solution if businesses are growing, are undercapitalised or have an order book that they can’t finance.”

Confidentiality is preferred by most businesses as it allows the maintenance of internal debt collection controls. It is also critical to allow the business to respond to sales opportunities.

But Spielbichler says any stigma around invoice finance has all but disappeared. “Historically it was a product associated with struggling business, and often imposed by bank lenders. These days invoice finance has become a mainstay of working capital facilities among businesses of all types and sizes.”

East Yorkshire’s Bayram Timber supplies Scandinavian softwoods to the UK caravan manufacturing market, as well as to garden building manufacturers and fencing contractors. It has doubled turnover to almost £25m over the course of a ten-year partnership with invoice finance company Skipton Business Finance.

“Invoice finance is a solution if businesses are growing, undercapitalised or have an order book they can’t finance.”

John Gribbon, Secure Trust Bank Commercial Finance

Melton-based Bayram partnered with the provider after its previous provider ended funding in the midst of the credit crunch. Financial director Ian Jordan says: “Our original funder was no longer willing to fund invoices with the clients we had in the caravan manufacturing market, which was also struggling at the time of the credit crunch.

“We had to search for alternative options and were rejected by the large business bank lenders. We did receive alternative funding offers but they were either insufficient to meet our working capital requirements or had restrictive conditions attached.”

SBF has the muscle of mutual Skipton Building Society behind it. Managing direc- tor Greg Bell adds: “You could argue that Bayram was a marginal deal at the time but I liked the people and could see the vision they had for growing the business.

“Interestingly our stats recently showed that we are losing quite a few clients. But the vast majority no longer have a requirement. They come to us because they need cash, stay a couple of years, get themselves back on their feet, start growing their business and their profits and then leave. We consider that a success.”

Bell says that despite there being around 41,000 users of invoice finance in the UK, the market is fairly flat. That said, at the end of last year, figures showed that in terms of facility value, invoice finance business had overtaken overdraft volume for the first time.

SBF has streamlined that with a product called Skipton Select. It offers smaller SMEs just one charge per invoice, no interest and no additional fees. Bell says that provides a transparency of cost and it is easier from a budgeting perspective.

It has also launched a confidential facility called EasyDraft which is a competitor to a bank overdraft. It is linked to the sales ledger and effectively an overdraft but with a shadow ledger behind it.

Bell adds: “We are accredited with the Enterprise Finance Guarantee scheme which allow us to do invoice finance plus an overadvance should the business need it. So they can take advantage of an opportunity or mitigate a threat. We can do a 90 per cent invoice discount facility and a £100,000 cashflow loan.”

Discounting or factoring?

In factoring, a business effectively sells its ownership of specified invoices and its rights to the money due under its terms. Discounting has essentially the same benefits and involves most of the same features but it is a confidential process. Thus, the clients being issued the relevant invoices are not informed that your company outsourced collection.


The service fee: Usually, it’s calculated as a percentage of your turnover, and the percentage is likely to change depending on turnover. This fee is likely to vary between providers. It’s also often the case that fees for discounting will be lower than factoring, as there are fewer services being provided by the credit company. In most cases this fee is payable monthly, and is agreed either in monthly periods or on a rolling basis.

The discount fee: The cost of the borrowing. For each invoice that you receive an advance for, you’ll be charged a small finance fee (similar to the interest on a loan). This is to cover the time between you receiving the funds, and the finance provider receiving the funds from the cleared invoice.

There can also be additional charges that vary from lender to lender such as ending the agreement early or arrangement fee.

Need not apply?

Skipton Business Finance prefers to avoid companies exposed to supermarkets or construction because if the client ceases trading there is generally a contract which means you won’t get paid. But Spielbichler says invoice financing is increasing in industries with “indisputable forms of debt and solid evidence of sales and services”. There are no business-to-business sectors for which invoice financing is unsuitable, he adds: “There may be forms of debt that are more complicated to finance against, such as contracts, framework agreements, or stage payments, but we look at it on a case-by-case basis. From a regional perspective, there is certainly an increase in invoice financing among manufacturing and engineering firms in the North.”

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