The risks of a downturn to business are easily appreciated. Harder to see sometimes are the challenges inherent in growth. But as any business owner who has committed to sales without having the capacity or resources required to deliver them can attest, growth, with its spectre of “overtrading”, needs to be navigated very carefully indeed.
Right now, research from the Small Firms Association (SFA) suggests SMEs are gearing up for growth, with almost two-thirds of survey respondents expecting to recruit this year. With Brexit in train, many are considering growing export markets too. But all this costs money, tying up resources at a time when, the same SFA survey shows, cash flow is already an area of particular concern.
It’s why many are turning to invoice discounting. With it, businesses receive up to 90 per cent of outstanding invoices as soon as they raise them, with the balance coming when the debtor pays up, minus a fee.
It means a business can continue to operate without having to wait for payment from customers and, while rates are comparable to overdraft rates, unlike a fixed overdraft, it’s a line of credit that grows with your sales.
According to the Asset Based Finance Association (ABFA), the use of asset-based finance has grown substantially in Ireland, with ABFA members lending an average of €1.3 billion of working capital to 2,000 Irish businesses at any one time.
“This is a particularly pivotal time for our industry as asset-based finance has come of age and is now utilised by a significant number of growing businesses as part of a balanced approach to their funding,” says Michael Walsh, newly appointed ABFA chairman.
“This source of working capital finance has gained traction as more businesses develop a better understanding of how they can utilise the value in their debtor book to free up cash to invest in growth, M&A and other business opportunities. It really is a key enabler for helping businesses to achieve their potential.”
More sophisticated
As the market has grown, it has become more sophisticated too. Convertabill, a member of Independent Finance Providers Ireland, provides a suite of trade finance products which, along with invoice finance, includes order, supplier, sales, distribution and lease finance. These “enable businesses to take a smarter approach to financing their business capital requirements”, says Convertabill’s marketing and sales executive Damian Kenny.
“A key selling point is that each enables the business owner to control how they fund and grow their business, often removing the need for personal guarantees, liens and other restrictive practices common among traditional lenders.”
Part of the reason for this growth is that, as the market here matures, invoice finance in particular is no longer mistakenly associated with factoring, whereby debts are chased up by a third party.
On the contrary, business owners handle their customer relationships and, because the service is confidential, their customers never know about it.
It helps too that systems such as those used by Close Brothers Invoice Finance are self-reconciling on a daily basis, so “all the client sees is a revolving credit facility”, says chief executive David Thomson. “It’s a working capital solution linked to outstanding receivables, which leaves them free to run their business.”
It also reduces the risk of overtrading. “If I’m giving you 90 per cent of every outstanding receivable, your credit isn’t capped when you hit a certain amount, you get 90 per cent of whatever is outstanding,” says Thomson.
And it brings additional value when used to expand overseas, countering the old adage that the further the distance, the riskier the sale. “New markets mean new customers, which means new risks that you won’t get paid,” says Thomson. “With invoice finance, we can bolt on a credit-protection facility too, a nice backstop for peace of mind.”
