How asset-based finance has become vital to Irish growth
Proof that asset-based finance is now a truly mainstream funding product and a vital source of funding for Irish companies can be seen in the latest research from the Asset Based Finance Association (ABFA), the body representing the invoice finance industry in the UK and Ireland.
The figures show that during 2015 an average of €1.3bn in asset-based finance was in use at any one time by Irish businesses, up 3pc on the same figure for 2014, with many using the facility to fund expansion as the economy recovers.
Sales turnover generated by Irish companies utilising invoice finance in 2015 reached €25.9bn - the highest annual figure registered for Irish companies using invoice finance since statistics for Ireland were first collated by the ABFA in 2002. And figures for the end of Q4 2015 show that turnover by Irish companies using invoice finance was up 2pc on 2014.
These statistics will be discussed in more detail today at the ABFA Annual Conference which is taking place in Dublin and will be attended by 250 delegates from the UK and Ireland.
Attendees will hear how the rise in the use of asset-based finance as a working capital solution, especially invoice finance, has been driven by the recent credit crunch in Ireland when companies faced difficulty accessing finance. What many business owners don't realise is that their debtors' ledger is often the most valuable asset they own. This, however, means that valuable cash is tied up in the business and often comes in at a very slow rate, with companies often receiving payments far beyond the generally agreed credit terms of between 30 and 90 days.
This can place significant pressure on cash flow and, with less access to other more 'traditional' finance options, businesses have faced continued financial challenges. ABFA member companies, including banks and independents, will advance funding against a company's debtor balances, providing a pipeline of vital working capital to that business.
There are two main types of funding within invoice finance - invoice discounting and full service invoice finance, which is often known as factoring. Both allow businesses to release the working capital tied up in their debtor books.
In both scenarios, the finance provider will normally purchase the client's outstanding invoices, providing an immediate initial payment of the majority of the invoice value, with the remainder (less the financier's fees) paid to the client on payment by the debtor. Full service invoice finance incorporates an added service element, with the financier normally managing the credit control and collections process. This makes it particularly suitable for smaller businesses. In an Invoice Discounting facility, the client continues to manage its own credit control and collections and the facility is normally on an undisclosed basis, so the Debtor is unaware of the financing arrangement. The majority of the funding currently provided by the industry in Ireland and the UK is through Invoice Discounting facilities.
Businesses of all sizes and types in Ireland are now taking advantage of invoice finance to fuel their growth, with companies citing a turnover of up to €5m now accounting for 40pc of all funding advanced.
Funds advanced to companies registering a turnover of up to half a million for the last quarter of 2015 was €159m, while a further €72m was advanced to companies with turnover between half a million and €1m. Companies with a turnover of between €1m and €5m received €299m. Larger companies also see the benefits of using invoice finance to maximise their working capital, with €148m advanced to companies with a turnover of between €5m and €10m while €262m was advanced to those with a turnover of between €10m and €50m. In terms of bigger businesses, companies with a turnover of €50m-plus were advanced €333m in invoice finance.
In addition to an immediate cash injection, invoice finance also offers businesses an ongoing source of funding linked directly to their current sales. As the business grows and their sales increase, so too does the amount of working capital that their financier can make available to them. As the economic recovery hits its stride, having funding that automatically expands with your business is a significant advantage.
For a business looking to capitalise on a growth opportunity or avail of discounts by paying early, being able to rapidly raise and deploy funds can give you a vital edge over your competitor.
The ABFA statistics also note that a variety of sectors in Ireland utilise invoice finance, including manufacturing, distribution, services, transport, retail and construction, indicating the diversity in the types of businesses being supported by invoice finance.
Invoice finance has evolved considerably over the last 30 years and now has a deserved reputation of delivering for businesses not only during challenging times, but also through periods of growth.
Despite this growth in invoice finance, there is still an amount of unused availability which can be accessed. Of the €2.3bn in funding available from ABFA members, €1.3bn is currently in use, meaning there is a significant amount of funding still available.
As the economic recovery continues to take hold, increasing numbers of businesses are realising that invoice finance is an ideal option for getting investment plans off the ground quickly, as providers offer expertise across a wide range of sectors, ensuring the process can be smoother and quicker than seeking traditional funding products.
The time to seek finance will depend on your individual circumstances, but the time to learn more about your financing options is now. Businesses looking to learn more about asset-based finance can contact one of the ABFA's Irish members for assistance or checkout www.abfa.ie for an in-depth guide on how invoice finance works.
Deirdre Moore is chairperson of ABFA Ireland and head of AIB Commercial Finance Ltd