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Cashflow Clinic: Common Questions Asked When Businesses Want To Expand Using Invoice Finance

Jan 8, 2008
There are many questions that regularly come up when businesses are looking to raise extra capital for expanding their businesses or manage day to day cashflow. This article looks at three commonly faced issues and provides the best possible solution.

Q. My company imports garden furniture from China and India and I distribute to the UK retail and wholesale markets. I ship goods to order, have a highly seasonal
business and am now approaching my busy period. I fund my business with an Invoice Discounting facility with an independent finance company and I am happy with the charges but they have told me that my advance rate of 90% is as high as they will go?

A. The nature of your industry and, specifically the purchase transaction, is such that you could link a trade finance solution into your Invoice Discounting facility. The trade finance company and the Factoring Company can even be the same funder.

This means the funder will open the letter of credit for you and purchase the goods from your overseas supplier.

The traditional credit term of 90 or 120 days will allow the goods to be shipped and delivered as you raise the sales invoice and put this through the Invoice Discounter. The money they generate will be used to clear the letter of credit.

Q. I run a recruitment consultancy and I have short term contracts overseas. My business is very much project driven and the turnover profile is feast or famine. My bank converted me to Factoring and they chase my debts quite hard which is upsetting my clients and, in addition, when the sales are low I have no cash.

A. There are essentially two problems to resolve here. Before we look at these problems, it is important to say that sales financing is the most appropriate method of funding for your business.

The first problem is the nature of the sales funding product, you clearly have a full service factoring product and, whilst many companies find the outsourcing of the credit control a major benefit, it is not working for you. Approach your finance partner and look at Invoice Discounting as a solution. This will provide you with the working capital benefit you currently enjoy but the collections are left with you and it is a confidential method of finance so your customers will not know you are funding your debts in this manner.

The second issue is the erratic nature of your turnover; there are two solutions to this: a fixed overdraft that would accommodate the cash pressure during the low sales periods and provide a 'buffer' facility. Alternatively, If your bank is not willing to provide such a facility directly then ask about the small firms loan guarantee scheme. This is a loan, where the bank provides the credit but the government / DTI takes the vast majority of the risk. There are rules of qualification, however your bank should be able to guide you. Alternatively there are finance providers in the Factoring and Discounting market that can provide a small firms loan to support the current working capital facility.
About the Author
John Mce writes for Hilton-Baird Financial Solutions who offer free independent business finance advice and has helped over 2,000 UK businesses raise extra capital including the use of Invoice Finance.
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