Hop on the bandwagon
When it comes to finding alternative capital for growth, perhaps not every source can be considered “hip”. At the trendier end, new streams from crowdfunding and peer-to-peer lending – two phenomena of the internet – are proving to be increasingly popular. At the other end is invoice financing, which has been around for some time, yet is often ignored by businesses.
Times appear to be changing – and new and old worlds colliding. MarketInvoice, set up by former investment bankers, is an online invoice financing platform that has grown rapidly since it was created in 2011. The government was impressed enough to invest £5 million of the £1.2 billion from its Business Finance Partnership through the platform last year. MarketInvoice sold £65 million worth of invoices in 2013 to take it through the £100-million sales mark, carrying out 2,000 transactions on the platform.
According to the Asset Based Finance Association (ABFA), European companies are increasingly turning to invoice financing. Sales by invoice financers that are part of the ABFA rose by 14 per cent to £71.2 billion in the third quarter of 2013, up from less than £50 billion in the third quarter of 2009.
There are, generally speaking, two forms of invoice financing. With the first model, known as factoring, a company sells all of its unpaid invoices to an invoice financer, be it a bank or an independent specialist. The invoice financer is then responsible for collecting debts from customers. It pays the money back to the company once it is collected, minus fees.
Invoice finance is best used as a catalyst for growth, and a means by which a business can prosper and thrive
With the second model, known as discounting, an invoice financer lends money to a company based on the value of the company’s unpaid invoices; again, minus fees. The company remains responsible for collecting customer debts. When customers pay up, the company transfers the money to the invoice financer to pay off their debt. In turn, this allows the company to borrow more money to cover new, unpaid invoices.
Invoice financers tend only to take on commercial invoice books rather than public invoices. They will also take their cut of revenue in return for their services. With factoring, some customers might feel uneasy about being contacted by a third party.
Nonetheless, companies using invoice financing will receive as much as 95 per cent of the money they are owed from unpaid invoices within hours of an invoice being sent out, according to an estimate from Royal Bank of Scotland. Both forms of invoice financing can free up significant amounts of capital and management time.
“There’s a fundamental lack of knowledge about invoice financing,” says David Thomson, chief executive of Close Brothers Invoice Finance. He thinks accountants and financial advisers will, out of habit, tell businesses to head straight to the bank and try for a loan, rather than find a solution closer to home.
A recent survey by IGF, the independent commercial finance provider, found that two thirds of accountants had never suggested invoice financing to assist their clients with cash-flow issues. “Invoice finance has all too often been viewed as purely a last resort,” says Tracy Ewen, IGF’s managing director. “However, this is not the case. Invoice finance is best used as a catalyst for growth, and a means by which a business can prosper and thrive.”
This hunt for alternative growth finance exists because companies are still finding it hard to come by bank loans, despite interest rates dropping to historic lows. Cash from government schemes has generally not made its way to business. Economic forecasters are predicting that onerous new capital requirements on banks will stop them lending at the low rates last seen before the financial crash. Private investors, such as angels and private equity firms, are more cautious after getting their fingers burnt in 2008.
In Darlington, Solo Thermal Imaging makes equipment used for detecting fires, diagnosing injuries in horses, and aiding search and rescue missions by the emergency services. Managing director Victoria McLaren says invoice financing helped the company to send its first order to Bulgaria and is now assisting further exports. Her bank refused to provide the necessary funds to do so.
Alan Walker, the managing director of Walker DieCasting, a Midlands-based producer of zinc and aluminium casts, recently switched from invoice factoring to invoice discounting. Mr Walker believed DieCasting had outgrown its “laborious and time-consuming” invoice factoring facility because the company had grown big enough to look after credit management itself rather that outsource it.
“We saw a 20 per cent increase in sales in the first two weeks,” he says of the switch. The move allowed him to take on a £1-million contract from a new client, doubling his turnover.
With invoice financing, Close Brothers’ Mr Thomson says, small businesses can get access to cash more quickly than they would by applying for a short-term loan. “Companies might have balance-sheet issues, but unlike bank managers, invoice financers look at the health of the sales ledger rather than the balance sheet,” he says. “Invoice financers look for a viable business, with a widespread customer base, which provides a product or service that’s invoiced upon completion. It’s as simple as that.”
He adds: “Businesses don’t generally fail for lack of profit. They fail because they can’t access enough cash.”