The government is targeting UK SMEs and start-ups with reforms to make it easier for businesses to expand, with the aim of helping push the economy back into growth.
"Britain's businesses cannot grow, export and innovate without proper access to bank credit. But they also need alternatives when looking for finance," said Vince Cable, Business Secretary. "The government wants to see a shift in the market structure towards non-bank lending."
Cable's comments coincided with the launch of a guide to alternative sources of financing, published by business lobby group the Confederation of British Industry (CBI).
As many businesses look to deliver growth through expansion, the need for a steady cash flow and reliable working capital solutions are providing an ever stronger marketing for Invoice Factoring Finance and Invoice Discounting, so it is great to see the UK government pushing for alternatives to high street and commercial bank lending.
An intersting artilce here that sums up some of the countries business sentiment towards a shift in growing your business and financing.
to quote the article:
" So wary are Britain's five million SMEs that the report revealed they are bypassing their banks entirely and resorting to alternative finance such as invoice factoring. This type of facility has a number of advantages over an overdraft for both the bank/asset-based lender and the company.
• The facility is linked to sales and not the balance sheet or performance of the business. As sales increase the facility is flexible and will grow with the business.
• The facility will be contracted for a fixed period giving a business stability, unlike an overdraft which is always repayable on demand.
• The perceived risk of the facility to the lender is much lower as borrowing is secured against an asset (the sales invoice); as a result the level of security required is reduced when compared with the requirements for an overdraft.
• ABL facilities can normally be approved in a matter of days and implemented very quickly, in most cases far quicker than implementing an overdraft with its security requirements.
• Although the total charges on an ABL facility may be higher than an overdraft, most businesses are convinced that the level of flexibility and reduced security requirements are valuable benefits worth paying for.
For a growing business that needs working capital to expand it is clear that asset-based lending provides a real alternative. The stigma around seems to have gone. At a time when overdrafts are increasingly difficult to obtain or even retain, it seems the once poor relation could be a business owner's best friend."
The Government is giving all businesses in the FTSE 350 one month to sign up to new rules obliging them to bills on time. Whilst this is a step in the right direction there is still nothing to stop companies legally setting out their payment terms. The Prompt Payment Code is 5 years old this year and I do not believe this code has materially changed the way that many companies pay their bills.
All businesses supplying larger companies should ensure that they have sufficient working capital in place to deal with the extended terms that are often imposed on them by large companies. Invoice finance remains the favored source of funds to make sure that the there is sufficient working capital to keep businesses running.
I shall keep an eye on whether this initiative is working.
Working capital is the lifeblood of every business. Without sufficient working capital
a business cannot meet its day to day liabilities and as a consequence may fail.
In the past the High Street Banks have provided capital via an overdraft secured either
by a debenture and sometimes external security provided by the shareholders and directors. Whilst the overdraft still exists factoring or invoice finance is now an increasingly normal method of providing working capital finance for the SME market.
The arrangement falls into two main areas;
Factoring- A factoring company takes an assignment of all outstanding
and future invoices and makes an advance of up to 85% of the value
of the invoices when they are raised. The factor will collect the money
from the customers and make the balance available when the customer
has paid. Costs are dependant on workload and risk. Interest rates charged
are in the region of 2.5% to 3% with charges in the region of 1% to 2.5%
of assigned sales.
Invoice Discounting – Similar to factoring apart from two main differences.
The factor does not collect the monies from the customer and the customers
have no knowledge of the involvement of the factoring company. The ledger
is managed by the company and the factoring company is more exposed as
the money has to be passed to them by their client and does not come direct
from the customer. Costs are lower for invoice discounting facilities as there
is less work for the lender, however there are more risks and these risks will
be reflected in the rates charged.
Main differences in an overdraft and invoice finance facility
Banks tend to have gearing policies and will only lend on a multiple
of 3 or 4 times the net worth of the Balance Sheet. A company with
a net worth of £50,000 would struggle to borrow more than £150,000 to
Factoring companies advance against a ledger. A company with a net worth of
£10,000 but a ledger of say £150,000 could raise, subject to the quality of the
ledger in excess of £100,000.
An overdraft may not rise in line with growth and may hold back the growth
ambitions of a company.
As sales grow so will a ledger and Factoring companies will finance this growth as long as they are comfortable with the ledger.
Banks can impose covenants to increase their security. These can be easily breached
and an overdraft is an ‘ on call’ facility.
Factoring companies offer 12 month facilities and their conditions are generally
Focussed on the performance of the ledger.
What Factoring Companies Like and Dislike
An ideal profile can be summarised as follows. A well established company
selling a straight forward product with no post invoice liabilities to a well spread
and low risk customer base.
It is fair to say that most proposals do not fall into this category. A proposal may
have one or two of these categories but not all. The positive aspect of factoring is
that facilities can be adjusted to meet the requirements of most companies. A factor
will look at all the issues, positive and negative and will be keen to structure a deal that will provide the prospect with a sensible working capital arrangement.
Not every proposal will be acceptable and the following can cause problems:
Businesses where the directors have had a history of corporate failure.
Goods that are sold on a sale or return basis
Construction related industries
Certain export businesses
Contra trade businesses
Products sold by stage payments.
Concentrations with one or two customers.
The above represent the main concerns for factoring companies. I could add
more items , however in order not to complicate things I have kept the list short. You will note that I have not included such matters as trading or creditor issues.
Whilst these are issues with larger facilities factoring companies are quite supportive of businesses where there have been trading problems.
A factor will focus on the ledger they are funding and if they are comfortable that they
can recover their advance then they will be prepared to offer a facility on terms that
protect their position.
Security and Terms
Factoring companies will require the following
Guarantee of key directors
Warranties of key directors
The level of guarantee will depend upon the quality of the proposal. In certain situations they will limit the guarantee to a low figure. However they will
require a warranty which relates to the fact that all invoices represent a bona fide
transactions. Most factoring companies will offer 12 month facilities and many will
push for 2 year agreements.
With over 20 factoring and invoice discounting companies now offering a range of financial products this sector is offering a much more flexible service than any of the mains are able to offer
Ultimate Finance Group Plc
The Group announced their results for the Year Ended 30th June 2012.
Revenues are up from £9.7m to £11.2m and operating profits up from £904,000 to £1,447m. These results are very encouraging. The company have expanded their [product range including a trade finance division. The company have been established ten years and appear to be going from strength to strength in a tough market place.
Hugh Craen has had over twenty years experience in the factoring industry.
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