Invoice finance – is it right for me?

Invoice financing can be a real life saver for many businesses, helping them finance expansion and growth. So why does it still have such a bad reputation?

I was at a networking meeting before Christmas and was casually chatting to an accountant I hadn’t met before about the positive outlook for 2014 for businesses generally. He got onto a bit of a hobby horse on the subject of financing a growing business and was less than generous about invoice finance /factoring. He was proud of the fact that he had never recommended this ‘last resort finance’ to any of his clients.

He didn’t know of my commercial banking background and quickly lost my attention with a diatribe of reasons why any successful business should ever touch it – ranging from exorbitant cost, loss of control, more red tape and bureaucracy, to the downright shame of your clients knowing you couldn’t get an overdraft!

I honestly thought I’d gone back to the 1980’s – and moved on (at Warp Factor 3 Mr Scott !!) to a much more affable crowd of people.

Helping a profitable business fund growth

And I didn’t think any more of it - until last week when I was trying to help a window contractor fund two large tenders, which he knew he would get if he could finance it.

But, the Bank wouldn’t touch it because of the sector. He had no other assets to raise money against and had put his life savings into the business already.

It was a profitable business with an excellent track record, but funding this growth in turnover was proving very difficult for him as his accountant and business partner had ruled out invoice finance on the grounds of cost (without doing any cost-benefit analysis).and those dreaded words again, “last resort finance” – I thought I was back in my time warp!!

However, I wasn’t walking away from this one as, in my opinion, application or invoice finance was a real solution for him. I persuaded him to see a sector specialist who quickly overcame the perceived stigma issue with a raft of industry users, explained how the process could support their workflows, payment schedules and maintain the client relationship, just leaving the dreaded cost issue.

And that was the easiest bit!

What does it actually cost?

There are fees to pay – obviously - interest costs when you draw down (just like an overdraft, you are only charged for the days you use it, but much cheaper) , an arrangement fee (again cheaper than an overdraft) and a service fee linked to a percentage of the invoice value.

It’s this last one that people have a blinkered view on, so don’t ask themselves how they could mitigate this cost? And how much more profit could they make if they used it?

In my example here, it was a no-brainer. Jerry, who did all the tender costings, just built in an extra line into his spreadsheet for ‘cost of funding’ which was only 0.8% of each contract value and, hey presto, he had made it self funding. Brilliant!

I haven’t heard yet if Jerry got his two tenders, but he now knows that he can fund them when they do come off - and any others that come his way, which they will.

The morale of my little story - talk to an advisor who understands your business, don’t discount a possibility until you know the full facts, and never ever listen to accountants called Bodie and Doyle – even if they think they are professionals.