Invoice Finance – under the magnifying glass
Invoice Finance is an increasingly popular form of funding for SME’s. Latest figures for Q3 2018, reveal that Invoice Finance and Asset Based Lending grew by 2% and continues to support over 40k UK businesses. With figures now comparable to total funds drawn on overdrafts, businesses should be considering how invoice finance can help their businesses grow.
However, despite the growth in awareness and usage, many businesses and indeed their financial advisors rule out invoice finance because they don’t think its suitable for their situation. We pose some of the more challenging questions the team at Pulse Cashflow get asked by prospective clients and their financial advisors to our Managing Director, Toni Dare to answer:
Q: What size of business are you able to fund?
A: We fund businesses from start-up – where first year turnover is predicted to be in excess of £300k - to £15 million. However, our largest client turned over £40 million so we are flexible dependent on the client.
Q: How much funding do you make available to clients?
A: The level of finance we provide to a client depends on the business and its situation.
The maximum amount of funding to one client is £2.5 million but we provide facilities as low as £30k-50k and everything in between.
Q: Do you insist on personal guarantees?
A: Like most funders, we will always look to secure a Personal Guarantee from the major shareholder/director of the business – whether this is limited, will be subject to the facility and our considered risk of the debt. In taking the guarantee we will also want to see that the guarantor is a homeowner, this provides traceability – but the real purpose of the guarantee is to rely on the support of the Directors during any potential failure and recovery of the book debt.
Q: What if the current funding relationship has broken down or the business is suffering creditor pressure?
A: We will look to assist turnaround situations - subject to a credible turnaround plan - manage-aways’ and instances where the current funding relationship has broken down. We treat each client individually and fairly basing our decisions on the quality of the debtor/debt. To assess this, we review the credit limits available on the clients debtors as this provides us with insight on the likelihood of our client being paid for services provided.
Q: What if you can’t obtain credit limits on the debtors?
A: If the debtors do not appear creditworthy, this may well be where the enquiry comes to a halt and we cannot proceed any further. We will of course revert to the client/financial advisor to see if there is supporting evidence to the contrary. However, if a customer doesn’t have the means to pay for goods received, it is only prudent to ask why risk selling to them?
Q: The business is exposed to only a few debtors and concentrations can occur. Can you fund these debtors?
A: We look at this on the strength of the debtor, the paper trail involved and the security available. We may also look at selective debtor facilities.
Q: What's the next stage after you receive supporting credit limits?
A: If the debtors appear supportive to the limits required, the next stage is to speak to the prospect regarding the invoicing procedure and paper trail to support the debt. A solid and reliable audit trail is very valuable.
Q: What happens if the business is seasonal or has unusual circumstances?
A: Our flexible approach means that we look at things on a case by case basis and will work hard to fund clients experiencing these situations. Where the business has seasonality, we
will work to provide a flexible funding facility to provide the cashflow required to fund the procurement of goods upfront.
Q: The business’s ability to collect cash when due from their customers can be problematic at times. Will this matter?
A: Our factoring solution includes credit control support functions such as debtor verification and debt collection which will help speed up the time it takes to collect invoice payment from customers resulting in a positive effect on cashflow. In addition to this we do offer a standalone fully outsourced credit control service for firms who do not require funding but could benefit from having more time to focus on productive tasks.
Q: What unexpected fees might a client incur?
A: We believe in transparency, so we charge a single fixed fee for our solutions ensuring you know what to expect. That fee will be fixed as a percentage of annual turnover. This fee is fixed for the duration of the facility, typically 12 months or our client can secure this funding and the fixed rate for up to three years, providing peace of mind from base rate changes as well as helping the business to budget accurately. So, no surprises!