Invoice Factoring Blog

A guest post from David Hirst – IFG Macclesfield.

The Daily Telegraph reported last week that the money supply M4 has shrunk again by 5% in the last year to a record low. This collapse was driven by the banks which continue to scale back their lending to businesses, the data showed. It also revealed that this continued in April and that smaller companies are being charged a higher premium than ever for credit compared with larger ones. What ever happened to Merlin?

In RBS’s recent results it announced that it no longer had need for billions of funding from the government and had paid it back. Now we know where the money came from!

SME’s need to look to other sources of finance. Invoice factoring is often an easy choice but business owners need to take care as whole of turnover facilities can be expensive and restrictive if not matched to their needs closely enough. Annual costs exceeding £50k for a facility under £100k are known and we’ve seen several where that fee is charged for under £200k facility. Spot factoring can be a better choice providing more flexibility, and a model driven limit that continues to reflect growth as it happens.

The Olympic Committee have a reputation for protecting their intellectual property quite severely so I am not sure whether I am even allowed to write a blog that uses the word Olympics. Anyway, here goes and if I try to link it with the phrase invoice discounting as well, all hell may break loose!

But the Olympics are likely to prove hellish for many, many small businesses in the UK. Just think about it. Productivity will be shot to hell. Staff will be on holiday; others who actually make it to the workplace will be following and talking about their favourite sports on computers, phones and TV’s rather than working . So will their suppliers staff and their customers staff. And that is not even thinking about the many businesses in the South-East whose logistics will take a battering as the transport system seizes up.

The net effect is sure to be that cheques and payment runs will not be done to schedule and orders that might have been placed will also be delayed. Don’t also forget that to keep transport off the road many businesses supplying “non-essentials” are being urged to delay deliveries until after the Games period further delaying invoicing and payment cycles.

So what happens? Salaries still need to be paid, as do landlords etc. so SME’s working capital is likely to be strained as customer payments are delayed. But, and this is where it gets really interesting, the strain will only be felt over a relatively short period. Perhaps a month maybe two before everything settles back down. It strikes me that this is a perfect scenario for these businesses to use spot factoring to meet the shortfall.

Spot factoring delivers cash against a company’s receivables. There is no long term commitment as there is with traditional invoice discounting neither are there the set-up fees or ongoing service fees normally associated with discounting or factoring. Ideal really, an (Olympic) champion solution!

According to the widely quoted Begbies Traynor quarterly Red Flag report it is manufacturing industry that is leading the economic recovery. Despite the gloom and doom spread by many of the naysayers the UK still boasts a vibrant, world class manufacturing sector and it does not seem to be doing too badly, or at least not compared with some others.

Construction and leisure still seem to be the areas where levels of distress as measured by this report remain high. So not all is rosy.

What will be required though as the economy scrabbles its way back up is a continued supply of credit and with continuing Euro area problems the pressures on traditional funders balance sheets remains severe. It will be from sources of alternative finance that funding for growth will have to come and whether this is in the form of spot factoring in the cashflow finance arena or business angles or crowd funding for equity the demand will be growing.

What all these alternative sources deliver, particularly when compared to traditional forms of finance is flexibility. The new funders have actually looked at the market and asked themselves the question what is it that the client values rather than echoing the incumbents attitude which seems to be what can we get away with.

Spot factoring is an ideal example of this and allows companies to factor sales invoices as and when they need to rather than being locked in to long term agreements that force them to factor their entire sales ledger, whether funding is needed or not. A great solution!

Seasonality is a significant issue for many SME’s. The cricket equipment supplier, Christmas tree seller or music festival organiser have fairly obvious peaks and troughs in their cashflows; many other businesses have a similar problem.

Often for nine months of the year working capital requirements can easily be met from internal resources but for the balance of the year help is required.

Traditional whole of turnover invoice finance companies whose models are built round long term contracts and monthly service fees fail to provide the solution these companies need.  Who wants to be paying service fees when you aren’t using the service for nine months of the year!

Spot factoring is the solution. A “use it as you need it service” spot factoring allows for the ad-hoc factoring of invoices when a business needs to raise working capital without any commitment or consequent costs when they don’t.

A perennial problem, cash management, but one that 95% of manufacturing executives in a recent KPMG survey say is a top priority for their business.

But it is not just the problem of cash management, it is improving it that really sets the best companies apart from many of the also rans. Working capital management for the one man band or the multi-national is a key part of business operations and one that if not correctly handled will be the death of them.

So while there are many financing tools available to the multi-national a much misunderstood and increasingly important tool for the SME is invoice finance. Whether it be invoice factoring or discounting invoice finance companies can provide growing businesses with a source of funds that is flexible and effective.

Spot factoring, as  a variant, builds on this with no contractual lock in and a use it as you need it approach that is the ultimate in flexibility. So, while those manufacturing executives fret about how they can improve their cash management more need to look to debt factoring as the solution.

The recent announcement by government of the SME “credit easing” or National Loans Guarantee Scheme is to be welcomed as it again highlights the plight of SME’s and their access to funding. Is it going to work? Well perhaps, perhaps not.

I suspect it will free up some additional funding for larger SME’s solely on the basis that because the banks can de-risk by putting lending in to the scheme and thus getting it guaranteed they will be able to increase limits. That will help hose who already have a facility. For the business that the banks are currently not lending to I can see little that will change. Risk appetites at the margin which is where funds are most needed are not going to alter.

So where does that leave these businesses? Invoice finance or debtor finance is the solution. Invoice finance companies have a great product but with a single figure percentage of businesses using them they need to shout louder and more stridently that there is a solution that is being underutilised.

It had been confirmed that Billions of pounds of government-backed
loans will be made available to small businesses after the European Commission
approved a £20bn guarantee scheme.

This credit-easing programme will be available to small businesses
over the next two years under a National Loan Guarantee Scheme (NLGS). Plans
for the initiative were first unveiled by Chancellor George Osborne in November
2011

The commission also cleared a second measure, the Business Finance
Partnership, which aims to increase the credit supply to small businesses
through non-bank lending.

The thing is, will it make any difference? From the research and
certainly the feedback we get from SME owners these initiatives make great PR
but don’t really make access to finance any easier. Would it not be better for UKPLC
- step forward Vince Cable, to start promoting alternative solutions like
invoice finance, with its facets of debt factoring & invoice discounting?

There is a growing wave of “alternative funders” now
coming to the fore, online portals, crowd funding, selective & flexible
factoring & more, but we don’t really see this publicised enough.

Any suggestions as to how we remove some of the negativity still
surrounding the “factoring” world and get SME owners to realise the
opportunity out there.

ABFA have just released updated figures for the invoice finance industry. It is available here.

For invoice finance companies it makes for good reading and supports the issue we continually bleat on about – invoice finance or debt factoring is the way for SME’s to finance their growth in the current environment and that it is not the road to ruination that some still persist in saying.

Here are some facts -

• total advances up 7% year on year versus a decline in wider lending of 3.7%
• firms using invoice finance grew their turnover by 13% in 2011

Interestingly, according to the ABFA figures the average turnover of a business using invoice finance is £5.7 million. I must admit a figure which I thought would be higher.

Two positive pieces of news hit the streets this morning. The accountants BDO released their latest business trends report showing that business confidence is improving and has reached its highest level in nine months. The actual jump in confidence was the largest month on month figure since December 2009.

Also released were industrial output figures for the UK. While monthly growth figures were slightly lower than expected optimists have pointed to quarterly figures that show growth and that the trend is in the right direction.

Whether higher oil prices and continuing Euro problems will allow this to carry through is a moot point but it does show that there are maybe some green shoots out there.

As always the big question is how to finance this growth at a micro level? The banks are still stressed so it looks as though the opportunities are still there for invoice finance companies. Debt factoring is increasingly the solution for SME’s encountering problems in obtaining overdraft finance and it does not looks as though this is going to change any time soon.

A new phrase to add to my lexicon of terms coined during the “great funding crisis”. Used in a presentation this morning to explain why our banks seem to think they are meeting SME funding needs yet SME’s keep saying the opposite. The fact is many SME’s are informally asking their bank managers “what if ” and being told “likely no” so they do not apply while a large slug of companies that are also in need of finance are pre-guessing the outcome and just not bothering to even ask. Discouraged demand!

What was positive at the launch of the Next Generation Finance Consortium was the message that alternative finance is available and invoice finance is to the fore. Speaking to many business owners and advisers the whole concept of spot factoring and selective invoice finance was well received and there is a growing realisation that this can meet a genuine need within the SME community.