Those of us who have worked in the invoice finance industry for any length of time will be familiar with the claim that factoring is funding of the last resort. Although that is nonsense, it appears that no matter how hard we argue to the contrary, some parts of the banking industry still see Invoice Finance - and factoring in particular - as the ‘poor relation' in their cash flow funding armoury.
And yet, happily, demand for Invoice Finance appears to be on the rise, not just from those who have been turned down for funding through ‘traditional' channels, or who have had their overdrafts removed, but by businesses that have taken the proactive decision to explore its finer detail, and realise the benefits it can deliver.
The biggest demand in 2014 (in terms of leads generated through our brokerage) came from recruitment companies, ‘traditional' users of both invoice finance, comprising more than 17% of all leads generated. But they were not the only businesses seeking non-traditional sources of cash flow funding. Wholesalers (14.5% of deals brokered), Business Service providers (10.4%), Manufacturing companies (9.4%) and construction businesses (9.2%) have also been seeking cash, and switched on to the advantages that Invoice Finance can bring.
The most successful companies are those that manage their cash flow effectively, and that means keeping a keen eye on credit. Bridging the gap between the point at which an invoice is raised, and the point at which the money enters your bank, can be a challenge. It's why Invoice Finance was created.
Invoice Finance is a form of cash flow funding that allows you to release up to 90% of the value of cash tied up in unpaid invoices, usually within 24 hours of raising an invoice. How it works is simple: you send a copy of the invoice to both your customer and the lender. The lender will then make a pre-agreed percentage of the invoice value available to you, collect the payment from your customer, and return to you the remaining percentage of the invoice value, minus any fees. Different types of Invoice Finance services are available to suit different needs; for example, it does not always require the customer to pass the management of their sales ledger over to the lender. Ownership of the ledger can be retained in-house.
As can be seen from the leads generated last year, Invoice Finance tends to suit smaller and mid-sized businesses whose principal ‘asset' is their sales ledger (ie their invoices). The main advantage, of course, is that it provides an immediate injection of cash. Rather than having to wait 60 or 90 days, or perhaps even longer, you will have money immediately available to you to re-invest in your business. Having cash up front enables you to pay your suppliers more quickly, and negotiate better terms as a result, taking full advantage of supplier discounts for early settlement. What is especially good is that the more invoices you generate, the more cash you will receive. It therefore ‘rewards' growing businesses, encouraging growth rather than holding it back.
Invoice Finance remains a relatively inexpensive way to consistently borrow cash for a long period of time and can generate up to 4 times more cash flow as verses an overdraft. Sure, invoice finance can be a more expensive option than a loan or overdraft but it does provide a compelling alternative when measured against the cash flow advantages it provides
Last year was an interesting year for the Invoice Finance providers, and 2015 is shaping up to be more interesting still. The new government would do well not to become too side-tracked by ‘trendy' or headline-grabbing cash flow funding ‘alternatives' when proven ‘alternatives' already exist, but are still yet to be given the credit they deserve. Perhaps this year will be the year that Invoice Finance finally makes its mark as a great alternative to the more traditional forms of business funding such as loans and overdrafts!
