First, it is useful to consider how, in an ideal world, businesses should be prudently financed.

    The prudent way to finance a business is to match the type of funding to the assets being financed. For example:

    • Goodwill and losses should be financed by equity;
    • Property should be financed by equity or long-term loans;
    • Plant and equipment should be financed by asset finance over the useful life of the asset or equity;
    • Stock should be financed by a combination trade creditors, trade finance and overdraft;
    • Trade debtors or receivables should be financed overdraft/revolving credit facility or invoice factoring/discounting.

    The advantage of financing a business by matching type of funding to asset life is the avoidance of pressure from Lenders to repay loans when the business either expands rapidly or starts to make losses.

    However, it is not often possible to follow this prudent formula, as funds are seldom available for the longer-term requirement such as equity and long-term loans.  The owners then have to consider the use of short-term funds with loans subject to performance covenants and that are repayable on demand.  Owners then need to understand and manage the risk of investing in assets financed by short-term loans that can be recalled on demand by the lender.

    In years gone by, bankers were prepared to finance working capital (stock and debtors) with overdrafts supported by debentures granting them fixed charges over assets and, depending on the level of risk, further supported by directors’ personal guarantees.

    The distinction between fixed and floating charges is of importance because holders of a fixed charge have priority over the preferential creditors but holders of a floating charge do not. Accordingly, upon the insolvency of a debtor, a fixed charge holder will be paid out before preferential creditors. In contrast, the proceeds of floating charge assets are subject to the costs of realisation, the expenses of a relevant insolvency procedure and the preferential creditors.  Only after these costs have been deducted is the floating charge holder entitled to receive any remaining funds.

    In 2005, the Lords ruled unanimously that a standard form debenture used by most banks and other lenders created only a floating and not a fixed charge over the book debts of the borrower. The banks and other lenders standard procedures needed to be reviewed as the security of a fixed charge over book debts was no longer available.  Combined with the credit crunch of 2008, banks became unwilling to lend against book debts with out other means of security.

    One of the consequences of this House of Lords decision is that it makes factoring as a means of financing a business increasingly attractive to financial institutions, as it avoids the problem of how to take an effective charge over the book debts.  Instead the Lender simply takes an assignment of the debts.

    Therefore, debt factoring and discounting has increased in popularity as a way for lenders to fund book debts whilst retaining security over those assets.  This method of finance also fits the ‘matching’ principle explained above as the line of factoring finance revolves with the creation and collection of book debts.

    Over 40,000 businesses in theUKare now using the advantages of invoice finance at various stages of their business life.  Using such facilities can release funds based on the value of the business’s outstanding invoices, typically up to 90% and can be available within 24 hours of raising invoices.

    This form of finance is even more crucial if other funding requests such as loans and overdrafts are turned down by the business’s current bank.  Therefore, more businesses are looking at factoring and discounting.  The benefits of these two forms of invoice finance are briefly summarised below:

    • Factoring provides cash-management with the sales ledger and collections being managed by the Lender.  Therefore, the business gets the benefit of a credit control service from the factoring supplier.  The business will get immediate cash injection against outstanding invoices keeping the cash flowing.  The business’s customers pay the Lender directly and so are aware that invoice finance is being used.
    • Similarly to factoring, confidential invoice discounting helps to release cash tied up in outstanding customer invoices without customers knowing that invoice finance is being used. Unlike invoice factoring, the business handles its own sales ledger and credit control.

    In a highly competitive market many lenders are offering not only extremely good rates but a flexibility which often includes trial periods, no upfront fees, no minimums and even single invoice factoring.  Seeking the help of a broker is a way of being able to find a lender with a good fit to a particular type of business and one where the facility can be moulded to the business’s requirements.

    Compare Factoring is an independent broker whose panel includes over 20 of the UK’s best lenders.  Nick Cookson, Compare Factoring’s development manager, said “We are experienced in the factoring industry and view each client as an individual.  We always carry out an in-depth ‘fact find’ about every business with which we work and not only find an appropriate lender for their business, but also help them through the process.  We also offer an on-going support service and a helpline to all of our clients”.

Customers Stories

Conrad Thornton of Green Street Media tells us how Target Business Assist have provided their business with a new invoice factoring system that has dramatically improved their cash-flow
Conrad ThorntonGreen Street Media LimitedChester, Cheshire

"Target Business Assist have provided our business with a new invoice factoring system that has dramatically improved our cash-flow position and flexibility with our clients..."

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