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There are over 30,000 UK businesses currently using invoice finance, with sustained growth in this number between 10-20% per year. Indeed should trends continue it is not unreasonable to believe that
within the next five years or less more funding to businesses will be provided through invoice finance than by overdraft lending.
There are a number of key reasons for this growth:
Flexibility
Traditional overdraft facilities are antiquated. They provide your business with a capped working capital facility based on an equation applied by your bank and assessed against your historic trading
performance. This is often unsuitable or insufficient for business managers today. Managers who no longer wish to be restrained by the availability of
cash within their business, who require flexibility of finance to fund growth looking forward or to finance other business ambitions. Business managers who seek to make business decisions in the boardroom
of their company, rather than allow them to be made in the credit department of their bank.
Invoice finance is sales led funding provided against today's sales. A facility is provided based on a percentage advance against your debtors. As your sales grow so do your outstanding debtors and so does
your cash availability under your invoice finance facility. There is no need to go back, cap in hand, to your bankers for an increase in your working capital facility in the hope that in a week, in three
weeks time, subject to providing additional security perhaps they approve. This gives you the confidence in your sales and marketing activities in the knowledge that you can fund immediately a new contract
to supply without reference to or the approval of your bank.
Security
Banks in recent years have increasingly encouraged businesses to finance their activities by using invoice finance. Having found that they are perhaps better secured through this means, the bank then being
closer to the business, to its debtors and hence their security.
Traditional bank lending, such as overdrafts, generally under utilises the debtor asset of a business as supporting security. That is, whereas factoring and invoice discounting advances a percentage of book
debts as high as 90%, it is very rare that a bank for overdraft funding will value your book debts at this level under the calculations that they use. Overdraft lending does not seek to fully understand the
true 'collectability' of your debtors and does not monitor this as an invoice finance facility does. Therefore then under a 'debenture' overdraft it is common that a bank may place a collectable value on your
debtors at anything between 0-50%. This is of course also assessed only on the day of the review of your facility and does not allow for any growth in the value of debtor assets throughout the year.
The result is often the inability to provide the level of facility that you may require or the request from the bank to provide them with even further tangible security, such as property assets, director assets etc.
Invoice finance maximises the debtor asset of your business and does not rely on the provision of other tangible security, whether you have additional security or not. This is particularly pertinent to partnerships
and sole traders against which a bank cannot take a charge over the debtors, but a factor can obtain an 'assignment' of these debts and hence provide funding solely against the company asset.
The inability or unwillingness for banks to extend further finance through an overdraft facility secured by a debenture over company assets has been further eroded given the Law Lords ruling in the legal case often
referred to as the 'Brumark' ruling. This has brought into question the strength of bank security over book debts under a debenture overdraft / loan. This is not applicable to invoice finance and has furthered the
already strong growth in this method of finance.
To summarise, invoice finance will:
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Provide a high level of working capital based solely on the debtor assets of your business. Including an initial injection of cash based on your outstanding debtors at the commencement of your invoice
finance facility.
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Will provide your company with a cash flow facility that will grow in line with your business. Best assisting sales growth or seasonal funding requirements.
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Will provide a facility that will negate the need to continually re-negotiate limit increases and give more control to the business managers of your company.
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'Cash is King'. This is a common phrase within the business environment. Invoice finance should significantly reduce a businesses cash flow headache leaving the business's managers well positioned to
pay more attention
to sales, marketing and of course profit.
There are a number of additional associated benefits with invoice finance such as optional bad debt insurance and credit management. These and others are discussed further within this guide.
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