Monday 19 August 2019

What is Invoice Finance?

Kevin Tonks

Invoice Finance is a flexible and revolving facility that provides funding to companies who provide trade credit to their debtors, the funds can be used for a variety of purposes such as working capital, negotiation of better terms with suppliers or as part of a funding package to acquire a business.

The facility funds the company in the period from issuance of an invoice until their debtor makes payment – essentially it allows the company to release funds tied up in the working capital cycle.

The Invoice Finance provider will advance funds as a percentage of the client’s debtor book or sales and the client company continues to deal with its customers and manage its credit control in the normal way. The facility is secured by the debts which are assigned (sold) to the Invoice Finance provider which will usually apply a limit which should provide enough headroom to allow the company to increase sales and funding as the business grows.

It is suitable for companies that:

  • sell on credit terms to other companies.
  • have a good spread of quality debtors
  • invoice for completed work
  • maintain good credit control and sales ledger systems
  • produce up to date audited or/and management accounts

Companies that are growing sales rapidly and need flexibility in funding:

  • operate in sectors such as
  • Manufacturing
  • Wholesale
  • Distribution
  • Export (appropriate credit insurance may be required)

Some Invoice Finance providers will look at providing facilities only to companies that meet a minimum turnover requirement.

International Business and Potential Benefits

Can Invoice Finance be used for International Business and what are the potential benefits?

In the modern business climate Irish businesses are no longer limiting their potential growth by selling their goods and services to the domestic market and are seeing opportunities for their business in in both selling and buying on international markets. Invoice Finance is an excellent facility for funding that trade.

Did you know?: The main Invoice Finance providers in the Irish Market can offer facilities in other currencies than Euro such as GBP and USD, the benefit is that any foreign exchange exposure can be reduced. This is important where we may see considerable fluctuations in a currency over a short period of time which can have a materially negative impact on net margins.

Invoice Finance providers fund against trade debt so as part of the assessment of the debtor book they are looking for debtors that are of good quality, well established with solid credit ratings and preferably a good spread of debtors. When dealing with foreign buyers there is an increased credit risk due to lack of ‘local’ knowledge for both the Invoice Finance provider and more importantly the Invoice Finance client. Invoice Finance providers will frequently request that the client takes out Credit Insurance on the foreign debtors.

What is Credit Insurance?

Credit insurance applies to both domestic and export sales; providing cover against the non payment of debts for sales made or services rendered in short and medium term transactions.

The policy and related services:

  • Protects a company against the adverse effects bad debt has on cash flow and profitability,
  • Provides informed guidance on trading with both your existing and new customers based on confidential information held on them by the insurance companies,
  • Compliments your credit management procedures; improving your cash flow,
  • Encourages trade and invoice finance suppliers to support your business because of their enhanced security
  • Access to full MI on companies that is not in the public domain

There are many Credit Insurance products and some of key ones include:

  • Single Risk – this is where a company insures only one buyer
  • Top buyers –the company insures their top credit lines only
  • Multi buyer – this is where a company insures a selection of buyers

From an Invoice Finance providers perspective if you have taken out Credit Insurance on your foreign debtor the finance provider would fund up to that limit assuming that there are no significant concentration issues on the debtors ledger.

I wish to find out more about Invoice Finance – where do I go?

All the pillar banks in the Irish market provide Invoice Finance and their websites are generally very informative, in addition there are a number of Independent providers. The main providers form part of the Asset Based Finance Association which represents and sets the standards for asset based lending, factoring and invoice discounting industries in the UK.

Sponsored by: Ulster Bank

Online Editors

Also in Business