Managing cashflow: Why you should consider invoice finance

Once considered the lending of last resort, invoice financing is experiencing a renaissance with everybody from Robert Peston to Tim Breedon advocating it as the answer to maintaining cashflow

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Cash is king, goes the old maxim. And a lack of cash can be killer: more businesses fail due to lack of cash than for any other reason – and that includes good, viable businesses.

So what’s the solution? 

Forecasting and monitoring how your business will grow and adapt in the short term and long term is of course essential.

Cashflow problems can arise when situations haven’t been anticipated, potential orders not accounted for, and even when your business is too successful and grows quicker than projected.

According to Andrew Stevens, relationship director at Lloyds TSB Commercial, many businesses manage their cashflow pretty well. Problems arise when SMEs, typically those owner–managed with a turnover of £5m plus, begin to grow at a much faster rate than their management originally forecast and budgeted for in their business plan.

“It’s in businesses where the owner-manager is trying to do everything by themselves, and doesn’t have the necessary financial team in place that’s required for a business of that size,” explains Stevens.

But what of those businesses with effective finance teams that still suffer from insufficient cashflow and that need to accelerate their growth to meet increasing demand?

Invoice discounting and factoring

The answer, according to the BBC’s Robert Peston and Tim Breedon (chief executive of Legal & General and author of the recent Breedon report), might not be what you expect. Yet it is, according to Peston, “almost as old as banking itself.”

It is invoice finance, a lending facility carried out through one of two products: invoice discounting or factoring.

Although these are different methods, both essentially do the same thing; they allow businesses to borrow money against unpaid invoices, a form of asset-backed lending, with the invoices acting as security.

Although a decade ago invoice finance was seen as a lender of last resort, its popularity more recently has continued to increase as its flexibility and dynamic link to business performance continues to be recognised as strong selling points.

An invoice discounting facility prevents the lender from having direct access to the client’s sales ledger; all invoice transactions take place via the borrower, and so are undisclosed to the borrower’s customer.

Factoring, on the other hand, gives the lender direct access to a business’ sales ledger, enabling the bank to automatically release funds as soon as the invoice is processed.

For Nigel Timothy, regional manager at Lloyds TSB Commercial Finance, factoring actually goes much further than this: it provides the bank with the ability to monitor the company they’re lending to, and so help facilitate the funds. It also allows them to chase outstanding payment on the borrower’s behalf, freeing up administration time.

“Factoring provides money up front and immediately. It’s flexible, so for businesses that are expanding, with their turnover increasing rapidly, the facility will grow with their sales instead of acting as a fixed level of funding.

“With access to a company’s sales ledger, we can carry out forecasting to see what it will need in the next 12 months, and so build in head room to allow for that potential,” explains Timothy.

All of which, says Timothy, “allows for you to get on with growing and running your business.”

Why use invoice finance?

Left to right Stuart Grant, Nigel Timonthy and Liz Houghton

Left to right: Stuart Grant, Nigel Timonthy and Liz Houghton

Recent statistics from the industry’s trade body, the Asset Based Finance Association, show that Lloyds TSB Commercial Finance continues to deliver performance with an annual net borrowing growth of 14.5 per cent against an industry figure of 6.6 per cent.

“Traditionally overdraft facilities were the first port of call, but more and more people use invoice financing now because that funding can grow with the business,” says Timothy.

“In the long-term it’s more cost effective than many other types of funding because it allows the company to borrow against the value of its sales ledger.

“Compared to an overdraft, a business can borrow more money, enjoy more flexibility, and, crucially, the money can be reinvested back into the business.”

This is precisely what Stuart Grant has been doing for the last three years. As the commercial director of Mint Velvet – a womenswear brand aimed at the over 25s – Grant and his three partners have grown the retailer into a chain of concessions stocked in 91 stores.

Spotting a gap in the market for “relaxed glamourous” womenswear, Grant launched the business in October 2009.  It quickly grew and by July 2010 Mint Velvet had a further 40 concessions in House of Fraser and Fenwick, as well as the initial launch in 14 John Lewis stores, two boutique stores and online.

As demand for growth began to exceed expectations, Grant and his finance team approached Timothy to discuss their funding needs.

“We approached Nigel because we wanted to grow the business at a faster pace, and he suggested we try factoring. I hadn’t considered it before.

“It took us a couple of sessions for us to gain an understanding of the product. The conclusion was that it’s a neat little product that will sort our cashflow out!”

The bank and Grant’s team settled upon a seven figure factoring package. This released the value of the firm’s sales ledger and allowed the team to concentrate on increasing the production of garments.

 “Now we’re in every John Lewis store and every House of Fraser almost, and we’re incredibly proud,” says Grant.

Which sectors suit invoice finance?

Interestingly, retail businesses and other business-to-consumer enterprises haven’t traditionally been the type of business to use invoice financing. Instead, the manufacturing, recruitment and wholesale sectors have been the primary benefactors of invoice financing.

Yet Mint Velvet’s concessions, which sees it supply large quantities of product to larger outlets rather than to individual clients, makes it an ideal candidate for factoring.

“In the fashion business there are troughs throughout the year,” explains Grant.

“You clear through your product in the January sales while at the same time building up your summer stocks, so you’ve got a warehouse full of stock ready to go while clearing through your old stock.

“This product allows you to draw down those funds immediately to allow you to pay those suppliers. This is much better than waiting 60 days or whatever your settlement deal is.”

Lloyds TSB Commercial Finance has seen fantastic growth in the invoice finance market and is determined to do all it can to ensure that all types of business are able to exploit its potential.

“We’re trying to look at more industries than we have ever before as we think it a good product that works very well,” says Roger Brown, regional director at Lloyds TSB Commercial Finance.  “We’re determined to keep simplifying the process too, and Lloyds TSB Commercial Finance is leading the way on this.”


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