Sunday Times - Ins and outs of invoice financing

Funding to cover outstanding accounts has been a boon for some — but make sure it’s right for you by Sandra O’Connell

Alan Connolly set up Allpro Services, a facilities management company, in 2002, providing cleaning, security, landscaping and recruitment services to large corporate clients and semi-state bodies. As with any fast-growing business operating off tight margins, navigating the gap between providing a service and getting paid is always tricky. It was a desire to win early-payment discounts from his own suppliers, however, that led Connolly to seek out an invoice financing service.

For a fee, providers pay up to 90% of each outstanding invoice at the outset and the balance is paid when a company’s customer ultimately pays up. Unfortunately, first time around, it made Allpro’s cash-flow situation worse.

“It was 2005 and we had won a contract that was worth 25% of our turnover — but the invoice discounter we were with, a bank, wouldn’t increase our credit limit,” said Connolly. “It put so much pressure on cash flow that we were struggling to pay the wages. It was a scary situation. We had to use every penny we had to pay what we owed the bank and get out of the contract, which was hard.”

Two years later, he decided to try again. “We were wary but, when it works, invoice discounting is supposed to be a limitless level of finance — it should grow as you grow — so in theory it was still the only way that made sense to us.”

He approached Bibby Financial Services, an independent invoice finance provider. “We were cautious because of our previous experience, but we went into it saying that, if we don’t get what we need, we are not going to do it at all.”

For a service business with no physical assets, releasing the value tied up in its debtors’ ledger helped to boost cash flow and fuel growth. Turnover has since grown to €4m, and the pace of growth is quickening: in the past six weeks, Allpro has won contracts worth €500,000.

“My advice to anyone looking for invoice financing is to know exactly what your business needs — and, if you’re not going to get that, don’t do it, because the wrong facility could wreck your business,” said Connolly.

Invoice financing is available here from the three main banks and a growing number of specialist companies, including Bibby, Close Brothers, Capitalflow and Grenke.
In August the Strategic Banking Corporation of Ireland (SBCI), a state-owned bank established in 2015 to finance SMEs, provided Bibby with a fund of €45m to be made available at a discount of up to 1.5 percentage points on the standard commercial rate for invoice finance. Though the rates vary, depending on risk factors, the corporation’s injection brings the average rate of interest charged by Bibby down to 4.5%, from 6%.

By the end of November, the value of invoice finance provided to SMEs by Bibby stood at €35m, up 10% on 2016.

According to the Small Firms Association’s November Business Sentiment survey, about 50% of its members are looking for external funding. Of these, half are seeking term loans, 11% want overdrafts and 18% are up for hire-purchase or lease agreements. Meanwhile, 6% want invoice finance, up from 4% this time last year.

It can make sense to go to one of the independent specialist providers, said Neil McDonnell, of the corporation: “Most of the SBCI funds are coming through pillar banks, which means that the guy you go to to get cheaper SBCI funding is the same guy who turned you down for the €50,000 you needed for that truck last week.”

Invoice finance doesn’t suit every business. “It doesn’t work for construction, because it doesn’t suit staged payments,” said Harry Parkinson, a founder and former managing director of Capitalflow, from which he is on gardening leave. “You also need to be careful not to have a concentration of sales with just one or two customers. If you have a customer that accounts for 75% of your revenues, and it goes into liquidation, you’ll be in trouble and still owe the money to the finance provider.”

Good credit control should always be your priority.

“The cheapest money you can get is your own,” said Mary Aylward, of Irish Credit Management Training. “Look closely at how you are managing your credit function before going down the invoice-financing route.”

She added that credit should be offered only if it helps to stimulate sales. “With factoring, you also need to be careful about whom you are passing credit collections to,” she said. “They will be managing an important part of your customer relationship.”

Susan Ward, of ATS Chartered Accountants in Kilcoole, Co Wicklow, said companies should be comfortable with the terms of the agreement.

“Where possible, try not to sign up to a long contract if you don’t have to,” she said. “Read the small print for hidden fees. If at all possible, boost your credit-management function first, by tying up clients to monthly retainers or by offering early-payment discounts.”

For Paul Mulligan, founder of Chef in a Box, a maker of premium handmade meals in Drumshanbo, Co Leitrim, invoice finance provided a recipe for success. He set up the business in 2009 but, since working with Bibby from 2013, he has increased the number of supermarkets he supplies from 60 to 159, pushing turnover from €1m to €2.5m.

“If I got a new shop, Bibby would give me 75% of the money within 24 hours, and that enabled me to grow,” he said.

Mulligan reckons the facility costs him 1.5% of his turnover. “Once you have it managed, it is not expensive. We draw down our money every three days, for example, where we used to draw it down daily,” he said.

“You also still need to manage your customers and need good credit controls, but it makes things easier on that front, too.”

Growth can pitch a company into “a Catch-22 situation”, he warns. “When you are growing, you need to win customers, so you supply them, but then you don’t want to be annoying them by chasing payment.”

Invoice finance has given Mulligan the confidence to add new customers. “It’s not expensive, if you have discipline with your customers and you’ve got a good business,” he said.
“Luckily, my products are flying off the shelves and having it in place means I can grow at the rate the market dictates.”

Posted on 10 December 2017


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