In his position as chair of the Asset Based Financing Association, Steve Box says that there has been around £64bn in confidential invoice financing conducted in the UK in 2010 among small- and medium-sized businesses. In his day job as managing director for HSBC’s UK invoice finance operation, he reports that in the last year, the bank has released three tranches of £100m each to different UK plcs in this way. “My overall advances to the market are up by £300m year-on-year. We are seeing a lot of demand right across the market and an increasing appetite from the top end plcs,” he says.
A good part of this increase is attributed to companies trading internationally and looking to their invoice discount provider to manage overseas collection for them. HSBC, for example, collects in 15 languages from 104 countries.
According to Martin Rotheram, head of invoice financing at Clydesdale and Yorkshire Banks – part of the National Australia Bank Group – demand for invoice financing is being driven now by the fact that cash is available instantly and that arrangements carry a lot of funding flexibility. Providers release an agreed percentage, say around 85 percent, of the value of an invoice to the business as soon as it is raised. If sales grow, the working capital available to the company grows at the same pace without the need for further bank negotiations. Routes to funding such as the government’s new finance scheme (see page 38) and begging the bank for a loan simply take more time and are more expensive.
However, Peter Barry, finance director at Meiko UK, warns that while fast access to cash and the ability to move with the business’s growth plans are strong upsides, there are some negatives to invoice discounting that companies need to bear in mind. Probably chief among these, he says, is the fact that if sales suddenly fall off a cliff – as they did for many companies during the crash and would if the threat of a double-dip recession became reality – companies could find their chief source of working capital dries up.
Finance directors also need to be aware of the fact that banks expect companies to be on top of collecting their debts. Advances on debt outstanding after 120 days will be clawed back – unless they want to insure against customers defaulting on their terms, which pushes up the cost of invoice discounting and may negate the reason for undertaking it.
Invoice discounting – the FD’s view
We asked FDs who have made use of invoice discounting to give us their thoughts:
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