Invoice Finance and Company Growth
We spoke to a business owner recently who’d started turning work away because she was worried there wouldn’t be enough margin left in the work once she had paid the cost of her invoice finance facility.
That immediately rang alarm bells because the business is a care agency turning over around £30,000 a month and, while going through the year-end accounts, the owner had started looking properly at what the invoice finance facility was costing her.
She was paying more than £12,000 a year in service fees, so in reality the facility that was there to help provide working capital and support the business had reached the point where she was questioning whether she could afford to take on more work. We’re sure you’d agree – that’s completely the wrong way round!
When did you last review your facility?
Invoice finance can be a very effective way of funding a growing business – you raise an invoice, you can access a proportion of that money without waiting 30, 60 or 90 days for your customer to pay, and that cash can be used for wages, suppliers and the other costs that come with delivering the work.
But an invoice finance agreement isn’t something you should arrange once and then forget about. Businesses change – turnover grows, customers come and go and payment terms get longer. One customer may also start accounting for a much bigger proportion of your sales and so the way you use the facility can be completely different from when you first signed the agreement – yet the funding arrangement can simply carry on in the background.
One of the things we look at when reviewing an invoice finance facility is what the business is actually paying, rather than simply looking at the headline rate. There can be service fees, interest, same-day transfer charges, renewal fees, disbursements and additional charges when you need the funder to make an exception or provide more availability. Individually, some of those charges might not look particularly significant, but over a month or a year they can add up.
We had another client whose original invoice finance deal was actually very competitive, but when we went through the statements there were charges being incurred simply because money was being transferred every day. He didn’t need it every day, he’d just got into the habit of drawing it down as soon as it became available. A relatively small charge each time doesn’t necessarily attract your attention but repeat it often enough and suddenly it becomes a meaningful annual cost. That’s why looking at the headline rate alone doesn’t tell you whether you’ve still got a good deal.
“But moving it will be a nightmare”
This is one of the biggest reasons businesses stay where they are. They assume moving invoice finance provider will be difficult, disruptive or that another provider will probably be much the same anyway. Sometimes staying where you are absolutely is the right answer. We’re not interested in moving a client from one lender to another simply for the sake of it, but there is a big difference between choosing to stay because you’ve reviewed the facility and it still works for you, and staying because you’ve assumed you don’t have another option.
Invoice finance is not a one-size-fits-all product and many of the terms around a facility can be negotiated, particularly when you understand the business, its customers and how it uses the funding. That’s where having someone on your side who understands the market can make a real difference.
Your finance should make growth easier
If you’re winning more work, you should be asking how you’re going to fund that growth, not whether the cost of your existing finance means the work is no longer worth taking. So if you’ve had the same invoice finance facility for several years, dig out your latest statements and have a proper look at them.
How much did it cost you over the last 12 months? What are you paying on top of the headline rate? Are you regularly incurring additional charges? Does the facility still reflect the size and shape of your business today and, most importantly, is it helping you do more business or getting in the way of it?
If you don’t know the answers, it might be time for a review. At Able Commercial Finance, we can look at your existing facility, explain what you’re actually paying and compare it with what else is available in the market. Sometimes the answer will be that you’re already in the right place, but if you’re turning profitable work away because of the cost of the finance that’s supposed to support it, it’s definitely worth asking the question.
