Borrowing on Bills

For many years, the invoice finance industry (factoring, invoice discounting and asset-based lending) has been synonymous with providing financial assistance to small businesses, a reputation of which the industry has been justifiably proud.

However, the perception that invoice and asset finance solutions are only for SMEs is now well and truly a legacy.

Over the last ten years in the UK, the invoice discounting area alone has grown a staggering 600%. Over the same period the cash advanced to clients has grown by 380% – with advances now representing over £10bn.

The amount of funding that invoice financiers are providing has rocketed, and this cash injection is proving invaluable to many UK businesses. And the major growth area is not smaller businesses.

Growth in the industry is down to a number of factors. Cash flow issues are not the sole domain of the smaller business. Having sufficient capital, and in particular, sufficient working capital is of fundamental importance to all companies.

There are periods in the cycle of all businesses, great and small, when cash flow issues hinder the growth of the organisation.

INCREASED BORROWING CAPACITY

Crucially for many businesses, invoice finance often enables them to borrow more money than would normally be available through more traditional methods such as overdrafts or loans.

Unlike most other alternative forms of finance, products and services from the invoice finance industry are able to grow in line with a business's requirements, making it an alternative user-friendly funding option.

The industry's funding solutions equally serve those organisations looking for accelerated organic growth, or those seeking growth through acquisition.

In recent years the UK industry has seen developments in the range of services on offer to clients and many Factors and Discounters Association members will now fund, not only against invoices, but also against plant, machinery and stock.

Providing funding against a variety of assets has seen more companies able to take advantage of a tailor-made, complete financial solution. Asset finance can assist with manager buyouts and buy-ins, and can provide turnaround financing and refinancing venture capital, amongst other things.

As the product offering has broadened, so too has the range and size of organisations wishing to take advantage of these forms of finance.

LARGER COMPANIES

At the higher end of the market, the use of asset-based lending is becoming increasingly widespread in MBO deals, largely because a structured asset-based finance package can provide more than just the funds needed to complete the initial buy-out transaction.

As well as the up-front funding, it can also provide a working capital line to supply companies with sufficient working capital after the transaction has been completed.

Recently, one FDA member funded the UK part of the largest asset deal ever to be completed in the UK. The five-year $675m (£360m) revolving credit facility will allow the UK-listed client, an equipment rental group, to invest further in its business.

This type of asset-rich company is perfectly suited to asset-based lending.

Also, syndicated deals, where several invoice finance providers work together to fund and spread the risk of a larger finance requirement, is becoming increasingly common in the UK. This type of lending is already particularly well established in the USA and the UK market looks set to follow suit.

Recent examples of some syndicated deals include:

• An FDA member worked with other financiers from other European financial institutions to secure a £120m funding package for a major logistics provider
• A wholesaler and distributor of tobacco products was provided with £160m to fund a management buy-out
• A supplier and distributor in the automotive industry was advanced £120m through syndication

CORPORATE COOPERATION

Continued cooperation of this nature between financiers will continue to open up funding possibilities for larger businesses and corporations at competitive levels of service and fee rates.

The higher-than-average growth rates among larger companies using invoice and asset-based finance packages bear testimony to the suitability of these types of funding for large transactions.

The future will see more of this kind of activity as funding partners realise that pooling resources opens the door to larger funding deals. Syndication is just one example of the forward-thinking and dynamic nature of the UK market.

The UK market is the most mature and well established, with the rest of continental Europe not far behind. Italy, France, Germany and Spain all have active invoice finance industries.

With increasing competition in the UK, many invoice finance providers have already expanded or are considering expanding abroad rather than face the downward pressure on prices found in an increasingly overcrowded UK market.

In addition to those markets already established, newly emerging markets in Eastern Europe such as Poland are proving attractive to those companies that are seeking a less-developed environment.

A further attraction of Poland is the similarity of the law to the relatively benevolent UK legislation, which has supported the significant growth rates of invoice discounting seen in the UK.

DIFFERENT REGULATORY FRAMEWORKS

Invoice finance is one area where the legislative environment differs greatly across Europe.

In the UK, we are fortunate in having a law of assignment that allows an invoice financier to offer products ranging from non-recourse factoring (finance plus a fully outsourced credit control service including debt protection) to confidential invoice discounting (which allows for the bulk discounting of debts on a recourse basis).

In countries such as Germany, the law is less flexible, allowing an assignment only on a non-recourse basis, but the providers of invoice finance working under this legislation have nevertheless continued to find ways of making this valuable alternative form of finance available to increasing numbers of businesses.

Across borders, laws may differ but the cash flow issues that affect businesses are the same.

In an increasingly competitive corporate world, businesses are forced to use resources more efficiently. Making sure there is sufficient cash to properly fund available business is critical to a company's growth, and indeed to its survival.

With tailorable products built around individual clients' requirements and such a clear track record of growth, the future seems very bright for invoice finance and those sourcing their funding from it, both in the UK and beyond.