Why, after 50 years of providing support to businesses, is there still resistance to the concept of factoring and Invoice Financing? By July 2015 the Asset Based Finance Association [ABFA], whose members provide asset based lending, factoring and invoice discounting and facilities, were successfully funding nearly 44,000 business in the UK and Ireland. ABFA’s. By that time they were already advancing £19bn of funds to their clients. They believe, however, that their members’ facilities would be suited to over 250,000 businesses in the UK and Ireland.
The team at BSF are also strong believers in asset based lending and invoice discounting as viable forms of funding for businesses in certain situation. We would like to explain why this is.
Finance of last resort- In the early days this was a view applied to factoring and invoice discounting, a view that was in some cases justified. It is our view however that, with the improvements brought about by legislation and the influence of the ABFA, if a company provides credit terms and has cash flow tied up in their debtor book then factoring and invoice discounting could/should be the first resort not the last in many cases, particularly for SME’s where, in many cases, high loan rates may be incurred, making other forms of funding more expensive.
Let us look at some of the other arguments used against the use of an Invoice Finance and Asset Finance facilities:
• That the amount (%) that can be drawn down is not what was originally agreed. In fact in nearly every case the client will receive exactly what it says in their agreement. – the issue however will often be the result of the client not fully understanding the terms and/or the invoice finance company sales personnel not always fully explaining them.
For example, if an initial advance has been agreed at 80% this will be against APPROVED Debtors NOT GROSS Debtors and it is this area that invariably is misunderstood. Typically invoice finance companies will not fund customers with poor credit ratings, goods sold on a sale and return basis, stage payment invoices and several other reasons.
• The Cost of the facility. In the majority of cases the ‘headline’ service fee and discount rate are generally very competitive when compared to alternative facilities. However many agreements contain additional costs for which termination fees are by far the most contentious. ABFA now operates a Code of Conduct among its members that promotes full transparency in terms of fees and contract terms.
• Personal Guarantees. Asking directors to stand behind the performance of the debtor book by way of providing a Personal Guarantee is generally standard practice. This applies whether it is a “specialist” Invoice Finance Lender or one of the mainstream Banks.
• Clients Restrictive Clauses. It is not uncommon for businesses to have in their terms and conditions restrictive clauses preventing their suppliers from sub-contracting or assigning any part of their transaction, thereby limiting the option to use an Invoice Finance facility. In 2016 the Government are bringing in new legislation to ban such restrictive clauses which should enhance suppliers to explore invoice finance facilities.
Having said all of this, it must be admitted that an invoice finance or asset-based lending facility is not the “panacea to all ills”. What is not in doubt, however, is that when applied in the right situations invoice finance and asset based lending have a huge part to play in funding SME businesses. They are highly flexible commercial finance tools that can be used either in isolation or as part of a “total funding package” alongside other forms of commercial lending.
Certainly that is our view at BFS where we never enter into discussions with a client with a single funding option in mind. We also understand what the funder is looking for in a new client and where they can be flexible in terms of such sensitive areas as length of contract, personal guarantees etc.
If you wish to understand more about any type of business finance, or to optimise your existing facilities, then please contact the team at Business Finance Services Ltd on 01327 349 779 or e-mail us at firstname.lastname@example.org . More information about our services is also available on our web site www.bufinserv.co.uk . We look forward to hearing from you.