The Changing Face of Invoice Finance

One of the most established and helpful business finance arenas over the last 25 years has surely been the invoice finance marketplace.  The ability for a business to cash in invoices early in order to aid cash flow clearly has a significant and positive impact on our long-term economy.

However, one could argue that this industry, until recently, had become very staid; very set in one’s ways.  That is until recently..

The boom in alternative lending following the 2008 Crash has had a major impact on a number of funders in all sectors, who are seeing market share slip away to new, lean entrants with competitive offerings.  The Invoice Finance sector is no different, and over the last couple of years, we have seen significant changes worth discussing.

Positive Changes for Borrowers

The best news is that all the changes are positive for businesses looking for invoice finance facilities.  The key changes to note are:

1. Borrowing Costs are coming down

2. Better facility incentives are now in place

3. There is a rise in lenders with sector specific, rather than generalist expertise

4. Significant improvements have occurred in key sectors that have been historically hard to fund

5. Some funders will now look at Start-ups and firms with under 2 years filed accounts

Let’s look at each in turn:

1. Borrowing Costs Are Dropping

Many funders have got away with very poor terms for a number of years, due to their reputation, size, or predominantly the lack of competition.  Now that businesses are more likely to shop around for the best quote, and get a better quote, rates and fee structures are changing.Let’s look at each in turn:

Administration fees can now be as low as 0.25%, and in a range anywhere up to 2%.  Interest rates are also dropping, and it is not unusual to get some where between 2.5% and 3.5% over base.  Disbursements, a more vague set of fees taken throughout the facility, are also being reduced or removed altogether.

As a result, there has not been a better time in a long time to get a review of your existing facility conducted.

2. Better facility incentives are now in place

Traditional facilities have tended to be very clunky when it has come to flexibility.  But again, to be competitive, the incentives, or components of facilities are changing.  Some examples of changes are:

• The removal of lock-in periods

• Notice periods reduced dramatically to as low as 30 days

• Interest Free periods for the first time

• The removal on some facilities of exit fees

• The requirement to work the entire sales ledger has changed

• Borrowers can select which invoices they want funded

• Borrowers can have funded single invoices only if they wish

Even the percentage of an invoice that can be funded is more upwards, with some funders getting to 90% of an invoice.

Again, as you can see, there are significant changes afoot that could be of immediate and dramatic benefit to numerous businesses.

3. There is a rise in lenders offering sector specific, rather than generalist expertise

One noticeable trend across virtually all business finance products and sectors, is the rise of lenders offering expertise in certain sectors.

Some funders (not all though) have come to understand that the best way to attract borrowers is if they understand their sector at a much deeper level, rather than being “all things to all men”.  One would think this wasn’t rocket science but most lenders historically, including the banks, have struggled to provide borrowers with a Manager that had experience in their sector.  Not any longer.

4. Significant improvements in key sectors 

Three very good sector examples that demonstrate this are the Construction, Recruitment and Media sectors.

Construction – the “staged payment” aspect of this sector has always been the most difficult part to fund.  The construction firms know it, and the funders know it, but this is definitely changing.   Historically factors have only looked at funding the current portion of the invoice,  but due to increasing confidence in the economy, and robust nature now of the demand for new homes, factors are taking a different view.  So Scaffolders, Quantity Surveyors, Engineering firms, Groundwork contractors, architects, and of course builders, can now get access to a very different set of options.

Recruitment – the interesting change in Recruitment is the more flexible approach taken with the Permanent Recruitment sector.  Temporary has always been the easier to fund by far, due to heavy legal implications and issues in the Permanent Sector should a placed candidate not work out.  Facilities for Permanent Recruitment firms are both reducing in cost, and the requirements needed in order to access funding.

Media – whilst always a decent sector, there is a significant rise in the ability to fund the newer types of firms in website design, online ad agency work and even App Developers.  There is recognition in some quarters that these invoices are financeable, and in the case of staged payments for long lead-time contract work, there is a willingness to fund these scenarios as well by funders with specific expertise in these sectors.

5. More funders will look at Start-ups and firms with under 2 years filed accounts

This is a major move forward in the sector as a whole.

Historically invoice finance has been a very traditional, conservative form of funding, where 2 years filed accounts, and a strong net income position, has been a bare minimum for many lenders. Funders now recognise that this set of criteria is stopping the growth of their operation when perfectly viable lending opportunities exist with newer businesses in the UK marketplace.

Positive Changes = Better Borrowing Opportunities

In summary, there is a wind change in business finance, and nowhere is that seen as strongly as the invoice finance marketplace. For businesses that need this funding to grow and survive, now is the time to review current facility agreements, or engage with new leaner alternatives that understand your sector and requirements better.  Otherwise, money is simply being left on the table.

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