Invoice financing, such as factoring, can be a valuable tool for the right company. We find out how to make it work for you.

If you are the FD of a small but growing business, invoice financing – borrowing against your outstanding invoices – can be the way forward. Some people have dismissed it as being an expensive and inflexible way to borrow money, but it’s a method of funding which has many fans.

Sean Cheek is the FD of growing business Rize Recruitment and invoice financing has bolstered the business through its crucial first few years. He says: “For small, medium-sized and even some large companies, invoice financing services can be pretty critical. For the past two years, we have been using it in a start-up scenario in my new recruitment business.”

“Fit” between the business and the financier is crucial, Cheek says. “For smaller businesses, it’s very important to choose the right company to work with.”
However, choice is limited by growth aspirations. “We wanted a financier who understood and had an appetite for international business,” says Cheek. “You need them to have a footprint and a flexibility that reflects the potential market out there in the future. The factor needs to grow with you – we are aiming for a £50m turnover soon and we want to be able to stay with one invoice financier.”

It might be worth going to a smaller funding house to achieve the most tailored service. Cheek says: “Smaller houses are more flexible than the bigger ones. We trawled the market extensively, looking at all the big players. None could provide the coverage and level of service. Another firm that we spoke to didn’t have a clue about the business or the sector.”

The “auditioning” process, he says, can be arduous, but Cheek stresses that it is worth it in the long run. “We looked at half a dozen funding houses and it was worth it.”
Of course, you have to satisfy the financier that the business is a suitable candidate for funding. Kate Sharp (pictured), CEO of the Factors and Discounters Association, says: “It depends on the nature of the business – if you have a good product and customers who pay you, financiers will be falling over themselves to lend you money. Obviously where there are businesses with no business plan, financiers will be sceptical.”

Cheek didn’t have a problem as Rize fitted the profile of the typical invoice financing client – a growing, high-turnover company with few phy sical assets. He says: “It is not difficult to get invoice financing if you have typical UK debts and typical UK clients. All our clients are household names so that wasn’t a problem.”

Invoice financiers think about how much a company owes. Any company where the amount owed is the largest value on the balance sheet will be a prime candidate. Traditionally, invoice financing hasn’t worked for retail because the biggest asset has been stock, but lately financiers have expanded their lending criteria.

Invoice financing is sometimes characterised as an expensive way of funding the business. Not so, says Sharp. “Factoring – one type of invoice financing – as well as offering credit, involves measuring the underwritten debt and collecting and providing finance against it, as well as credit control and management. Bear in mind you are not just paying for the cost of the finance. The costs should be comparable with other factors, though.”

Sharp adds that when banks are looking to offer funding, they will only look at the net worth and the profit. “With invoice financiers, this isn’t as important as the fact that a business has growth potential and a good turnaround plan.”

Providers will want to be sure that the business is in good order. A personal pedigree is important, too. “They look for a personal track record and experience of working in a management team,” says Cheek. “I spent ten years managing a company that never had a bad debt. I also had everything prepared – the balance sheet and profit and loss.”

Finally, for smaller business, tracing your financing is a handy tool for measuring your progress. Sharp says, “It is a good way of tracking the growth of the company as the finance grows with you. It helps with admin in smaller companies if they have to stay on top of it: it gives them discipline they might not otherwise have.”

Picture source

Key figures

£13bn: the amount advanced to UK companies to date by invoice financiers.

45,000: the number of companies using invoice financing, including factoring, invoice discounting and asset-based lending.

17%: the rise in the use of domestic invoice financing since June 2005.

105%: the increase in export factoring on June 2005.

40%: FDA member companies with turnovers up to £500,000.

14,800: number of invoice financing clients in manufacturing at Q3 2006.

204: number of invoice financing clients in retail at Q3 2006.

Source: FDA

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