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Factoring & Invoice Discounting

Cash Flow Casualties – How Brokers Can Help

By CreditMan Tuesday, February 3, 2009

Timid lending criteria from the mainstream banks are impacting on businesses at a time when many firms are looking for increased funding to help them ride out the downturn. Finance is often required to make the strategic and operational changes that will allow a business to maintain profitability in the face of toughening market conditions, yet these same conditions also affect a firm’s customers and suppliers with the potential to cause disruptions to the flow of capital through the business.

In 2008 it was the manufacturing sector which first raised concerns over cash flow. Retailers shortly followed suit and the cash flow squeeze suffered by SMEs who are experiencing late payments from large, corporate accounts has been well documented in the mainstream media. There are also numerous other factors that can impact on the levels of ready capital in an organisation. Examples might include a sudden rise in overheads resulting from legislative changes or new taxation regimes, the loss of an important account, or the abrupt withdrawal of overdraft facilities by a banking partner.

The cumulative effect of all these potential threats to the liquidity in a business can be seen in the results of the broker survey conducted by Bridging and Commercial in Q4 2008. For the question in which brokers were asked to specify the most common use for bridging finance at the time of the survey and one year previously, the number selecting ‘cash flow solutions’ rose by 50% across the 12 month period covered. This figure not only gives a broad indication of the extent to which the pressure on businesses has increased over the past year, but also points to a growing source of bridging transactions for brokers.

There are actually several finance options available to organisations that need to surmount a temporary glitch in their cash flow; the most appropriate will naturally depend on the precise details of the situation. Current conditions have instigated a rise in the number of firms utilising invoice factoring and invoice discounting services as a means of bolstering their working capital, but brokers should be conscious that for companies with a source of equity in the form of their business premises or other property assets, bridging finance might remain a more suitable and cost effective means of addressing those situations where a one-off capital injection is required quickly and for a short period.

Invoice discounting services typically cost an organisation between 10 and 20 per cent of the total assets being exchanged. Consider a situation in which an organisation requires immediate access to £60,000 to alleviate a cash flow squeeze. By factoring £72,000 of the outstanding assets on their sales ledger at a 20% fee, the company can access the £60,000 required at a ‘cost’ of £12,000. A three month bridging loan for the same sum will also allow the firm to access the funds required immediately but the total cost at a monthly rate of 1.5 per cent, including a one month redemption fee, would be £3,600. Even if the invoice discounting facility could be arranged for a 10% fee it would remain considerably more expensive. Provided that the cash flow problem is a genuine short term issue and an exit strategy is available, the bridging loan represents a far more cost effective way of accessing the finance required.