Cashflow Clinic 3 - Common Questions Faced by Busineses When Using Invoice Finance

by: johnmce
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Q. Despite a significant increase in our sales, our bank is refusing to increase our overdraft facility and have suggested that I consider factoring. Please could you let me know whether I should be concerned about what my customers will think?

A. In the UK nowadays, over 40,000 businesses use invoice finance. This sector is currently growing by double digits year on year. Invoice finance is a cost effective and well established alternative to overdrafts and traditional bank funding. Some years ago invoice financiers were perceived to be the lender of last resort, with companies using a facility when they were experiencing a downturn in sales and cash flow pressure. However, nowadays, a larger number of businesses turn to factoring, invoice discounting and asset based lending because they are trying to keep up with their ever increasing order book!

So, in terms of how your customers may perceive you using this product, they should see it as a positive form of finance allowing your business to best meet its cash flow requirements to underpin its growth. Dependant on your turnover level, an invoice discounting facility may be the right solution for you. That said, if you are still concerned about perception, please talk to us about various confidential facilities which may be available to you. This way your customers will not be aware that you are using any form of external funding.

Q. I run a relatively new start business and find it difficult to manage my cash and plan ahead because I can never gauge how much my factoring facility will release. To make matters worse my customers seem to take forever to pay me and giving credit terms is common place in the countries where I trade. How can I make life more predictable / easier?

A.Many companies use their creditors to ease the cash flow of their business, however pushing too much pain into your suppliers can be detrimental for your business relationships as well as late payment potentially adversely affecting your credit rating.

You are absolutely right that overseas transactions can often carry a longer debt turn, be it down to local customs in payment terms or language barrier in chasing the debt. The longer the debt is outstanding, the higher the risk of the debtor failure which will have a greater impact your business.

However, your factoring company should provide you with this collections expertise. It is not clear why you can't forecast the level of funding available to you from your factoring finance facility. Various facility nuances such as your lender's funding restrictions on the percentage of export debt, percentage of any given customer, and even your customers' rating can all affect the amount you receive from each invoice.

There could be a number of ways to help make life easier. The first is to talk to your finance provider and get them to look at a non-recourse finance solution, this will increase the funding period and provide protection against non-payment in the event of debtor failure or sometimes even in cases of protracted default. Alternatively if level of exports or the level of exposure to your top customers is an issue which falls outside your funder's criteria, then we can look at finding you an alternative funder who can take account of your business needs.

About the Author

John Mce writes for Hilton-Baird Financial Solutions who offer free independent business finance advice and has access to a number of finance partners helping over 2,000 UK businesses raise extra capital including the use of Invoice Finance.  

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