If your business is growing rapidly, it means two things: Firstly, you’re doing pretty well. Secondly, you are probably in a tricky financial situation.
It’s successful businesses that are selling so much that they can’t get the money in the door fast enough to pay for their next heap of products – a problem typical for those of you who issue invoices on longer terms; from 30 days to 60, or even 120. Without the cash from previous sales, how are you going to find the money to pay for your next supplies?
This is where invoice finance comes in. This means selling your invoices to a finance provider who, in return, advances you a percentage of the value of those invoices – typically 85 per cent to 90 per cent – as well as manages and arranges for their collection.
During the credit flood, bank lending crowded out invoice finance. “It’s easier for us to give the business a secured loan than to do all the work needed in an invoice financing,” one US banker once said. But now that the wholesale funding market is diminishing, invoice finance and its simplicity seem like a good deal to fund a business again.
However, this is a route to finance that’s not for everyone.
Why would you want invoice finance?
Keep one thing in mind: this choice of financing unlocks capital very quickly. Invoiced a customer? Draw money right away. It makes a lot of sense for a business selling b2b, particularly on credit terms longer than 30 days. Late payment of invoices is a notorious problem, and when it happens regularly it can cause a fatal imbalance in a company’s cashflow. Wholesalers who must buy more stock, or recruitment consultants who must pay their temping staff rely heavily on incoming payments in order to run their business, and fall back on invoice finance to solve the cashflow dilemma.
If cashflow isn’t an issue, the method can cost-effectively help you to reduce your overheads; to react quickly to opportunities that the market presents; and to enjoy a fair degree of flexibility.
“Due to its short term nature, I’ve seen most businesses use invoice finance for working capital and short term needs,” said Sanjeev Chhugani, co-founder of e-financing hub Bilbus. “If needing to finance growth and expansion, a solid business case will yield better priced financing geared towards the expansion project. I’ve very rarely seen businesses refinance expensive debt using invoice finance.”
Crucially, funding available through invoice finance increases as your turnover grows. This means that if sales increase rapidly, your cashflow can keep up. That’s a significant advantage compared to options such as overdraft facilities, who may require renegotiation when you need additional funding, which is often involved with an imposition of questionable new terms. A good reason why many believe that in the currently very changeable economic environment, invoices might be the safest key to unlocking lending.
Who the lenders look for
Invoice finance lenders aren’t much interested in what you use their funds for. “Traditional invoice lenders have been, in my experience, primarily focused on whether they will get paid,” says Chhugani. A lender will mostly be interested in your payment history and its credit standing; in addition to your own financial situation.
Lenders’ approaches vary quite significantly, and your business financials will decide what lender to approach. “I’ve found that larger banks and asset lending companies tend to want to work with businesses grossing at least £2m, with more than two years of trading history, whereas smaller entities will look at £500,000 in annual sales upwards.”
Invoice finance deals usually go through as long as the invoices due are based on the supply of a good or service to another business, and have no contingencies allowing the buyer to “offset, recoup or claw back amounts already paid from current invoices,” advises Chhugani.
In other words, that means that as long the buyer has no reason to withhold payment – funds against invoices can be advanced.
Reasons to beware of invoice finance
The bottom line is, invoice finance is still a form of borrowing. This means, there’s a cost. You will pay a fee for every invoice factored, plus interest on the money you have “borrowed”. The result: slow-paying clients will still cost your business money.
Of course funding never (unless you’re extremely lucky) is free, be that of money or of compromise. An invoice finance deal will take some control over business from you: your factoring company may demand a say in the kinds of customers you take on (or rather the kinds of risk you take). You may even find your terms & conditions have to be changed.
The lender will take responsibility for chasing outstanding debts. Think about whether you’re uncomfortable with a third party demanding cash from your clients – in your name. The relationship management will still be up to you.
Finally, you might find that invoice financing is your personal equivalent to a cigarette; once you’re hooked, and your business is reliant on factoring for good cash flow, it will take an injection of capital to ween you off it.
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