In part 1 of this two-part post, I talked about the use of invoice finance as a cost effective way for business to fund its credit sales. While invoice finance tends to have ‘sweet spot’ sectors (manufacturing, services) and hard to do areas (construction, hospitality, consulting), the basic suitability is simple: we’ve seen deals go through as long as the invoices due are based the supply of a good or service to another business and have no contingencies (e.g “you weren’t wearing socks when you sent your invoice so we’re not ready to pay”) allowing the buyer to offset, recoup or claw back amounts already paid from current invoices.
In other words, as long as the customer/buyer has no reason (other than you did not perform) to withhold payment, and the lender sees a good chance of recovery, you can get cash against these invoices. Consumer facing businesses or those with contingencies or milestone payments have had more luck, in my experience, with term loans, lines of credit and even leases. Within the context of less available lending, of course.
Different lenders have different lending needs at different times. I’ve found larger banks and asset lending companies tend to want to work with business grossing at least $2m (or £2m in the UK ) with 2 + years trading history, whereas smaller entities will look at $500k (or £500k in the UK) in annual sales upwards. Single invoice lenders ( will finance a single invoice or customer and no contract, lock-in period) provide smaller businesses ($250k+ annual sales) with smaller funding amounts. Invoice auctions vary in their parameters, although with different lender pools (often a mix of individuals and investors).
Lender approaches seem to vary considerably, not only in terms of process, responsiveness, pricing and flexibility, but also in how risk is assessed. Some lenders still prefer to finance all your credit sales, others like to do revolving credit limits (like a credit card), and others pick and choose which of your customer invoices they’ll accept. Businesses younger than 2 years can find it difficult to find finance from larger banks and asset lenders but there are factors and more flexible lenders who offer single invoice/name financings to less established businesses.
So how do you work out if it’s for you? Simple. Shop around. If you have the time to spare, you can knock on many lender doors yourself, assemble all documents and the information they need to give you an indicative quote, and let them tell you what’s available. Or, if time is precious and you’d rather spend it on sales, marketing, customer services or some well deserved R&R, let technology do the work for you!
Lenders need to wade through your information to assess your ability to repay the debt, and the type of financing they offer can depend on your own circumstances as well as their own at the time.
So, we’ve seen many businesses get different responses/offers from different lenders with virtually the same information provided. One business was offered invoice finance by one lender, and a revolving line of credit collateralised by invoices and other assets by another lender.
That’s great for the business! You get a rough map of what’s out there for you, and some hints to show you the way forward. But as you’ve probably heard at your favourite restaurant, “I like it but you should try it and tell us what you think”!
Different needs require different funding. Need cash to cover credit sales? Invoice finance is worth a look. Want to finance fulfilment of an order? Order/trade finance could be the way to go. Have plans to grow the business? A term loan may be more suitable and cost effective. Cash needs change through the year? A revolving line could be the answer.
Invoice finance can be a cost effective way to fund working capital. The key is being able to compare it to other options available (i.e. “on the menu”) to you at the point in time you need funding.
I was planning to talk briefly about supply chain finance in this post, but think its probably better tackled on its own. In a nutshell, buyer-driven supply chain finance is where you give your customer a discount to pay you earlier than your agreed terms (i.e. 15 days instead of 75). There has been a fair amount of debate in the UK press about the pros and cons and supply chain finance and we see many businesses have differing views on the prospect of giving their own customers a financial gain for paying them on time. But, more on that another time…