Invoice Financing – An Answer to Debtor Protection?
Arguably the biggest restraint on businesses’ growth at present is the issue of late payment.
Debtor days are being stretched well beyond agreed credit terms as owners bid to ease the strain on their business’ cash flow, only serving to fuel the downward cycle as creditors have less cash to absorb the blow and commonly end up resorting to the same tactic.
This cash flow gap is proving to be the final nail in the coffin for many SMEs, as reflected by the fact insolvencies have increased in eight of the last nine quarters. Historically, business failures don’t even peak until two years after a recession ends.
Debtor protection is therefore a vital tool to protect businesses from the threat of debtors going bust but, as insurers have attempted to secure their own position, policies have increasingly been reduced and even withdrawn. Indeed, latest figures from the Association of British Insurers uncovered a 41% drop in the value of claims in Q2 from the previous quarter, this despite the steady rise in insolvencies.
Unfortunately, it’s a similar story on the funding front with the National Association of Commercial Finance Brokers (NACFB) revealing a 60% drop in total funding to businesses during the 12 months to August 2009.
But what is encouraging is the breakdown of these figures; hidden away was the value of invoice finance facilities actually rising during that period by a healthy 21%, and therein lies the answer to many business’ cash flow concerns.
Invoice finance specifically targets the issue of late payment by releasing up to 85% of the sales ledger value within just 24 hours of an invoice being raised, and continues to provide specialist funding support to struggling SMEs.
Facilities can be provided on either a confidential or disclosed basis, and can additionally include a dedicated sales ledger management service to provide expert credit control when chasing debts, depending on the business’s individual needs.
With the risk of debtor default prevalent, facilities can further incorporate debtor protection to safeguard the business from bad debts. Unlike credit insurance as a standalone product however, it remains very much available when sought through invoice finance, in addition to presenting a saving of 5% in respect of Insurance Premium Tax.
Latest figures from the Asset Based Finance Association revealed that credit protection payments through invoice finance facilities actually rose by 47% in the year to June 2009, in line with the 39% growth in insolvencies over the same period.
Meanwhile, these facilities, often referred to as ‘non-recourse’, accounted for 10.4% of total asset based finance client sales in the second quarter of 2009 – down just 0.8% from the previous year – to demonstrate the sustained availability of debtor protection through invoice finance during the recession.
Not only does invoice finance provide peace of mind to owner managers looking to secure new orders, it’s also the most flexible form of commercial finance available as the accessible cash crucially grows in line with the business’ turnover.
As a result, invoice finance is just as effective during a downturn as it is once the orders come flooding in – something that is increasingly looking like occurring soon. It therefore bridges the cash flow gap between the business paying its suppliers and getting paid by its customers, instead providing access to cash as soon as the invoice is raised.
As the UK’s leading commercial finance broker and voted Asset Based Finance Broker of the Year by corporate finance magazine, Business Moneyfacts, Hilton-Baird Financial Solutions has access to the full spectrum of lenders in the market.
By taking time to understand the business’ precise cash flow requirements, we can identify the tailored solution with the right lender to ensure the business is fully equipped to grow its way out the recession.
