What is Invoice Finance?
Invoice Finance is lending secured on the basis that a receivable (invoice) will eventually be paid by the debtor (customer). The lending normally takes the form of Factoring (disclosed to customer) or Invoice Discounting (undisclosed to customer), but now has many variants.
For B2B businesses the sales ledger is often the biggest asset and therefore the easiest to borrow against. Borrowing against invoices is usually the easiest and most flexible way to borrow. The number of suppliers of this kind of facility means pricing is driven down by competition.
There are suitable facilities for businesses from start-ups to multi-nationals. The industry serves around 50,000 clients who now borrow over £16 billion at any one time.
Factoring is the original Invoice Finance facility. The lender's involvement is disclosed to customers and the factor provides the credit control function. This allows management to get on with the more important job of growing the business.
Invoice Discounting was created to cater for those clients that could demonstrate proficiency in credit control and (in the case of Confidential Invoice Discounting) preferred to keep their financial arrangements to themselves. Nowadays the majority of Invoice Finance facilities are transacted on an Invoice Discounting basis. The basis of the facility, finance against invoices, is the same as factoring.
Invoice Finance where the factor runs the credit control system but it is done in the name of the client. This can be used where the client prefers confidentiality but appreciates the outsourcing element of factoring.
Selective Invoice Finance
Traditional invoice financing facilities have operated on what is known as a “whole turnover” basis. The financier is the main lender to the business and secures its lending by registering a debenture at Companies House. It is now possible to find facilities where the client is able to pick and choose which invoices to finance, sometimes known as Spot Factoring. This is very useful if the financing requirement is intermittent.
The Invoice Finance industry has historically avoided the construction industry due to the contractual nature of the business leading to account collection problems. This has recently changed and there are now a handful of financiers willing to provide finance against invoices or even “applications for payment” in this sector.
Asset Based Lending (ABL)
Larger companies (requiring in excess of £500,000) can ally Invoice Finance to finance against stock, plant and machinery and property. This inclusive type of facility from one single lender is known as Asset Base Lending or ABL.
This type of facility is where the financier works with a large buyer, providing finance to the buyer’s suppliers. It is an inversion of the usual operating method where the financier works with the seller, financing sales to customers. It is usually available only to the biggest companies with many suppliers but has recently become available to the stronger mid-market companies.
Who can use Invoice Finance?
Facilities are available for businesses from start-ups to multi-nationals. The only determining factor is a requirement that the client is selling to other businesses on normal credit terms (generally less than 90 days). The quality of the receivable is more important than strength of the user. It is ideal for companies set on a solid growth path who need a form of finance that will grow with them.