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scotpac1Businesses have clearly delineated life cycles and each stage – from start-up, to the growth phase, to maturity, and the exit of the founder – has a specific risk profile. This article examines just a few of the ways that invoice finance enables companies to plan strategically and manage the risks associated with each stage of the business cycle.

Start-up businesses: Incubation is the riskiest time for businesses – on average 90 per cent of first businesses fail – so it is very difficult to obtain non-secured business finance. However, start-ups can take advantage of factoring in a manner that mimics elements of seed funding. Assuming a business plan with high visibility, Scottish Pacific can establish a fast-track facility that kicks in from the first invoice to help a business gain a foothold during this critical period. Banks usually only enter the equation at a more advanced stage or will seek personal property security.

The growth phase: The next high-risk phase for a business is expansion. Orders flow in faster than the business can meet them, requiring investment in new premises, additional equipment and resources. Fixed-asset loan values don’t expand to match the business growth but because invoice finance is secured against your invoices, it grows with the business, providing working capital to carry you out of the danger zone.

Maturity: If a business survives start-up and growth hurdles, it usually matures and plateaus. At this point, management usually opts to either: diversify into new product lines; grow through acquisition; or diversify into export markets. It is also likely to encounter partnership disputes, risk-management and potential restructures. Invoice finance helps with all of these challenges and examples follow:

  1. Acquiring a new product or brand requires upfront marketing and inventory expenditure as well as acquisition funding. So long as visibility is high and the debt structure is established in advance, invoice finance can be extended against the product’s existing sales to fund the purchase. While technically the business does not yet own the invoices, as with residential property, simultaneous settlement means the invoice discounting facility kicks in in a timely fashion. This substantially reduces the cost of acquisition and streamlines a business’s cashflow during the vulnerable, cash-tight acquisition period.
  2. Buying another business: This is a similar situation to product acquisition. Invoice finance is a superb tool for funding growth through acquisition because it becomes a self-perpetuating, self-feeding loop. A business can use its existing debtors to help fund a purchase then, once it owns the debtors of the new business, it can use those to purchase another business – and so the cycle goes. It is not uncommon for businesses in some industries grow from £6 million to £12 million in the space of a few years using invoice-finance funded acquisitions. This is usually the stage where a business adopts a group structure but lowers its risk by ensuring each entity funds itself.
  3. Exporters: Factoring allows exporters to offer open trading terms while retaining full guarantee against non-payment and gaining a cash-drawdown facility. No other form of finance offers this flexibility. In addition, outsourcing these collections removes the headache of collecting overseas payments during different time zones, handling different currencies, languages and banking procedures. 
  4. Partnership and shareholder disputes: When one stakeholder in a business has property of a higher value than another, this often triggers disputes because the risk is unequally spread. Invoice finance allows businesses to remove personal security from a business-finance situation, solving this problem and de-risking personal assets. It can also be used to induce a new stakeholder with a desirable skill who is unwilling to place their property at risk.
  5. Customer insolvencies and concentration risk: It is not uncommon for a business to experience a serious customer insolvency. In these instances, they need an urgent cashflow injection to avoid suffering a similar fate. Invoice finance can be an excellent solution.
  6. Restructuring: Sometimes businesses hit a rough patch and need to restructure. Most financiers reject businesses at this stage because the prognosis is poor but if the company has a invoice finance facility in place, businesses can buy the time they need to restructure, maintaining continuity of trading and paying staff as they transition.
  7. Diversification and recession-proofing: Invoice finance is critical to helping recession-proof a business. If a financer extends a line of credit based on the value of the house, or business, this will most likely tighten during recessions when asset values fall, placing a further squeeze on your business. But because cashflow finance is not tied to fixed assets but invoices, it offers great advantages in periods of economic downturn, helping de-risk the business by diversifying the funding base and building in greater flexibility during tough times.
  8. Business takeovers, Management Buyouts and buying out a partner: The final stage of the business cycle is when founders chooses to exit the business in a manner that hopefully protect their legacy and staff. Invoice finance is brilliant for funding business takeovers and is equally effective for management hoping to undertake a management buyout. At a simple level, a retiring principal may wish to leave the business in the hands of his trusted second-in-charge who may not be able to afford the purchase. By talking to your invoice finance provider and accessing the company’s working capital, a situation can be structured and executed to that effect.

To summarise, cashflow finance is a powerful, flexible strategic financial tool that can power and protect a business from cradle to the grave. It also offers a vast range of operational benefits, providing working capital and allowing companies to: offer more competitive terms of trade; access funds quickly to capitalise on business opportunities; improve supplier relationships through prompt payment, improve customer relationships with faster fulfillment; gain strategic confidence with reliable cashflow; and obtain extra business finance against stock, plant, equipment and property.

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