Could invoice financing be the solution for you and your business?
When ‘invoice financing’ or ‘factoring’ is brought up as a financing solution, there is often a rolling of the eyes and memories of pushy salesmen straight out of college telling you how to run your business with all the charm and subtlety of a double-glazing salesman.
Sadly, this image was all too prevalent in the recent past and, as brokers, we have plenty of examples of dismal sales staff and awful contracts from which we have rescued clients.
Invoice financing has often had a mixed reputation. Major lenders were prone to forcing unsuitable and expensive contracts upon clients which were laden with hidden costs and restrictive terms. There was also the tendency to suggest that ‘factoring’ (whereby they control your credit control) was the best solution – it rarely was. Furthermore, lenders often had unhealthy relationships with other professions where the last consideration was the borrower’s requirements.
This has largely changed. The advent of peer to peer lenders has greatly shaken up the market and whilst their offerings and reliability can be mixed, they have usually offered greater flexibility and ease of approach with admittedly higher costs. Costs have frequently been an issue within the invoice financing sector, but we are now seeing the charges being substantially reduced to the levels where they are less than the cost of an inflexible overdraft. Competition is key, but it has to be utilised and a professional broker is the best source for doing so. The broker has to be fully independent and must commit to representing the borrower and absolutely no other party. Also, in response to certain difficulties within the industry, a code of conduct was imposed by the Asset Based Finance Association (‘ABFA’) and to the surprise of many, this has been largely adhered to.
There are over 50 active lenders in the market. They range from the major banks right through to specialists in certain sectors and locations. The choice is immense and the factors which need to be considered to ensure the right decision is made are wide ranging. Many borrowers and lenders can neglect to remember that a facility is not just for current requirements but also for the future. Each lender will have their own preferences in terms of your debtors and your sector and it is vital that the correct decision is made.
Our belief is that relationships are key. Unusually for brokers, we always endeavor to meet our clients before engaging lenders. The personalities involved can be key and face-to-face meetings are always helpful in uncovering the details that are so essential to understanding your business.
That aside, there are key issues which need to be addressed well in advance of a commitment to a contract and this is a vital component of any transaction. Export is often overlooked as is the very nature of the terms and conditions. Also, the status of the debtors can be key. These factors have to be weighted and negotiated with lenders.
So why choose invoice financing?
The plus points are strong. The invoice is an asset, and this can ensure that no other security has to be given. It cannot be assured that the dreaded personal guarantees will not be requested but they can in some cases be ‘negotiated away’. Furthermore, the facility will grow with your expansion. As your invoicing increases, so too can your borrowing. Also, the terms are now flexible with many contracts having short or no notice periods or minimums. If you are unhappy with your lender, it is relatively easy to move. Lastly, because it is the most competitive sector of lending, responsiveness is quicker than the slow slog through the major banks systems and call centres.
Finally, and perhaps most importantly, we believe in long term relationships and if another form of lending is more appropriate then we will recommend that course to you.
This article was written by Clive Pacey, an experienced independent broker with whom I work. We run a quarterly event called ‘Money Meet Up’. If any readers of this article are interested in attending the next session, which is likely to be held in January, please let me know.
If you would like to discuss your requirements, please get in touch with me at email@example.com or on 07775 540242.