Buyers’ guide: Invoice and asset-based finance
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The principle of borrowing money secured on a business’ assets, particularly invoices, arrived in the UK nearly 50 years ago, but has only really taken off in the last decade – in which time the market has swelled by 460%.
The number of businesses using such facilities jumped from 40,000 to 43,000 in 2005 alone, and in the same year £11bn of funds were advanced to companies.
Today, a growing number of banks and specialist lenders give you the option of borrowing money against outstanding invoices, your premises, equipment, machinery, fleet and even your brand.
Borrowing money against your sales ledger will be ideal for some of you, helping grow your business because the cash available increases with your customer list and charges are not payable on demand, unlike standard loans. But where do you start?
Probably not for you. Factoring is generally thought of as a development facility for small businesses with turnovers of less than £1m. Like invoice discounting (see below) it only works for b2b businesses that raise invoices, so retailers need not apply. Popular sectors for invoice finance include recruitment, manufacturing, wholesalers, courier companies, haulage, franchises and family businesses.
For an agreed administration charge and a small percentage of your invoice, a factoring company will take control of your debtor book and pay you for invoices up front; on the day that you raise them if need be. When your customer’s credit period is up – generally between 30 and 60 days later – the factor will call in the debt.
Factoring has the dual benefit of ploughing cash into your company while also acting as a credit and quality control service. Factors can root out late payers and act as a clear channel for customer complaints.
Steve Netherton, commercial director at Eurofactor, says a handful of owner-managed companies with turnovers of more than £10m use factoring because of these additional benefits, but they are the exception and not the rule.
Commonly perceived as a ‘grown-up’ version of factoring, invoice discounting gives you the same cashflow advantages but allows you to maintain control of your sales ledger, so the onus is on you to collect payments and forward them to the discounter.
If you are precious about your customer relationship then not allowing third parties’ access probably suits, although lenders are not debt collection agencies and it’s in their interests too to keep your customers happy and not harass.
It is also cheaper than factoring because your financier does less work for you, so the admin fees are proportionally lower.
On the flip side, because the discounter is kept at arm’s length, you’ll have to work harder to show them you’re a low-risk investment.
Because of its comparative value and light bureaucratic requirements, discounting has become a viable alternative for funding acquisitions, management buy-outs and buy-ins. In simple terms, you can use the assets of the business you hope to acquire to self-fund the deal.
Of course, the company must have a steady stream of sales, and you may need to arrange a complimentary package of funding to support your invoice discounting facility, but at the very least it will reduce the burden of loan repayments and could delay the need for venture capitalist involvement.
“It’s a fantastic route for acquisitions and buy-outs,” says Netherton. “The last five years have seen a big increase in deals funded by discounting companies because it takes away the need for private funders who’ll demand 20% or 30% of your business and a place on your board.”
Like all your suppliers, financial or otherwise, a discounting company has a vested interest in your success, and will want assurances that your infrastructure, client book and products work well. But that shouldn’t translate to a lot of work on your part.
In a nutshell, the effort involved sits between the light touch of an overdraft facility or loan, and a due diligence-heavy relationship with a private equity investor.
“On an operational level, your business shouldn’t change too much when you sign up to invoice discounting,” says Diane Blinkhorn, a director at Bibby Financial Services. “We verify invoices each time they are raised, and ask that communication channels are kept open, but there’s very little admin involved after the initial checks.”
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