The Real Value of Invoice Finance
Invoice finance has grown in popularity throughout the economic downturn, but has also attracted some criticism regarding cost. Peter Ewen, Managing Director of Venture Finance explains the real value of invoice finance and why businesses can not afford to dismiss it as a funding option.
Recent research published in the Financial Times (FT) found that total advances via Invoice finance at the end of last year stood at £14.1bn. This figure, from the Asset Based Finance Association (ABFA), shows the scale of interest for this type of finance driven by a lack of traditional credit-based finance and a decreasing appetite for risk amongst both lenders and borrowers.
Yet with this increase in popularity, invoice finance has also attracted criticism and it is clear that the industry still has an educational task to undertake. The same research, surveying 1,000 small businesses, highlights a continued lack of understanding of the nature and benefits of this type of finance. It found that 90 per cent of businesses targeted for invoice finance believe that the banks’ offer of invoice finance is driven by profit targets rather than their clients needs. Various businesses quoted in the FT story also said that they thought the finance was too expensive, while many of those that had been offered finance had refused it, questioning whether it would suit them.
Misconceptions
Moving forwards, the industry – including banks, independents and introducers - need to debunk these common misconceptions and ensure businesses are able to make the right decisions about the best funding for them. While the services given by different lenders can vary, it is not right that the whole industry be ‘tarred with the same brush’. The research portrays invoice finance as a purely profit-driven product and compares its rates directly to those of a business overdraft – but this does not compare like with like.
The view that invoice finance is prohibitively expensive is a common misconception, which simply does not stand up on closer inspection. It is true; invoice finance is generally more expensive than some credit finance but that is because it is a much broader financial product with many added advantages.
Due to the current need to oil the wheels of recovery, it is crucial that the industry works together to educate businesses quickly. Businesses need to be able to access the finance that is right for them to ensure that nascent recovery doesn’t grind to a halt.
A valuable lifeline
With the continued lack of available traditional finance, businesses are in need of other options and they should be aware that invoice finance can provide a lifeline post-recession. Venture Finance’s 2009 survey of 1,000 UK accountants found that fifty-eight per cent of businesses had been refused credit from traditional sources, such as banks. Meanwhile, 60 per cent reported an increase in their clients proactively seeking other sources of funding, such as invoice finance.
Invoice lending is ideally suited to the current economic environment as it allows companies to take charge of their own destiny. The ability to access finance directly after invoices are raised creates a virtuous cycle on which businesses can build and grow their own way out of recession. Accessing finance like this removes the stop-start nature of a business with little working capital by bridging the funding gap. In this way the route to business recovery can be shortened significantly.
Invoice finance is also highly appropriate for a more risk-averse business landscape. The levels of credit-based funding available before the recession and the lack of caution with which it was ‘doled out’, added to the weight of financial downfall. As a result, this type of finance is no longer readily available with stringent assessments and interest rates being placed on those that are lucky enough to be approved for a loan. Going forward finance providers and businesses are adopting a more common-sense approach towards finance that is more closely linked to business performance. This is why interest in invoice finance grew rapidly during the recession and continues to grow in the current environment.
A raft of options
The main types of invoice lending are Factoring and Invoice Discounting. Factoring means that the finance provider takes responsibility for collecting payment from a business’s customers, while with invoice discounting, businesses carry out their own credit control. The lender then advances the business the majority of the invoice value straight away rather than waiting the 30, 60 or 90 days for payment.
Bad Debt Protection (or ‘non-recourse factoring’), which can be provided alongside Factoring, is also an added benefit in the post-recession landscape. Bad Debt Protection means that the finance provider will recover any approved debts from a business’s customers and have no recourse to the business if they fail to pay. The best providers of Bad Debt Protection will also ensure that debtors are thoroughly and regularly assessed for ability to pay. This process significantly reduces the risk of defaults and ensures businesses are dealing with stable, quality clients.
Venture Finance’s 2009 accountancy survey suggests that protecting against bad debt is still a necessity for businesses, as a third of respondents reported clients suffering an average of 14 extra days delay to debt payment. Early results from the ongoing 2010 survey suggest that the late payment trend is continuing, while over three quarters of respondents also say their clients have witnessed a rise in bad debt.
It is easy to look at economic indicators and imagine that the road to recovery is a given - but this is not the case. The UK’s small businesses, the ‘engine of economic growth’, are still struggling to access the finance they need to change their focus from business survival towards expansion. The onus is now on lenders to educate companies as to the options they have available to them. Only by ensuring that businesses understand the full repertoire of finance they can access, will they be able to look towards growth and become the ‘engine’ the UK so desperately needs.