1. Part of Close Brothers Group plc
A guide to
invoice finance for growth
Signs are that we are slowly emerging from the deepest recession since
the 1930s and businesses are tentatively turning their attention away from
immediate survival towards long-term expansion. But with more difficult
times expected ahead for the economy and a continuing lack of funding
forthcoming from the banks, how achievable is this expansion?
David Thomson, Chief Executive of Close Invoice Finance,
examines the success of invoice finance as a growth enabler for SMEs.
The difficulty in accessing funds What to do when banks won’t lend
The formation of a new Government has, if nothing Despite claims to the contrary, high street banks
else, injected some much-needed confidence back seem now more conservative than ever as to their
into our business community and created a level of lending policies and concerns are that even as we
economic stability that we haven’t seen in years. Not emerge, albeit tentatively, from recession, their
hard you might say but given the rough ride SMEs prohibitive costs and rigid terms look set to
in particular have had to endure over the last few continue.
years, any amount of stability is to be welcomed.
Many commentators are of the opinion that the
Of course we are far from out of the woods yet and banks’ response to the forthcoming levies, cap
the full impact of the recent VAT rise remains to be on bonuses, and new capital requirements being
seen. Still, at long last business owners have a implemented by the Financial Services Authority
certain degree of direction and clarity as to the could make them even more risk averse.
future, and a growing sense that the road to recovery,
It’s well-known that SMEs make up 99 per cent of
however long and painful, might just be in sight.
our regional economy so it’s not hard to see that
Indeed figures drawn from the Close Small Business this attitude to lending is threatening to derail the
Finance Barometer 2010 2 would seem to support road to economic recovery.
this sentiment. It reveals that over half of UK SMEs
Where companies have been busy securing
plan to increase their headcount in 2011, a huge
new business, the problem they can run into is
increase on the previous year when only 11 per
overtrading. For the unprepared, over-accelerating
cent expected to do so. Even for those businesses
in an upturn can be as dangerous as the sharp
who have no immediate intentions of hiring, many
brake required in a downturn. To avoid overtrading,
are consolidating their positions internally, taking
companies need cash flow. If a business secures
measures such as investing in IT infrastructure and
lots of new orders, it then comes time to start
training, to ensure they are as efficient as possible
delivering on those orders. For that, you need to
when growth returns.
invest in the raw materials and the staff, and so
While businesses clearly feel that their prospects for on, and you need cash to do it.
expansion are looking up, a weak cash flow could
The bottom line is that no matter how optimistic
prevent them from taking advantage of market
businesses are on paper as to their expansion plans,
improvements and opportunities. Worryingly 90 per
they are merely pipe dreams without the necessary
cent of those surveyed are finding it as difficult, if not
funding.
more so, to access funding than this time last year.
So what’s going on?
1
The Growing Business Handbook. 13th edition Kogan Page. Published March 2011.
2
Close Small Business Barometer August 2010 – 500 UK SME interviews conducted by Lightspeed Research Ltd. |1

2. | A guide to invoice finance for growth
It’s clear that the new government have their work
cut out over the coming months when the banks
In the last year alone, nearly
remain reluctant to lend to SMEs, particularly in 46,000 businesses in the UK
sectors they consider to be risky, but those same
businesses need funds to prepare for growth. and Ireland have used invoice
Only time will tell if the Lib/Con’s £200 million finance facilities to fund their
extension to the Enterprise Finance Guarantee
(EFG) Scheme and the introduction of a £37.5 business and improve their
million Enterprise Capital Fund are enough to
deliver an effective economic stimulus. Each have
cash flow with the industry
their critics, some noting that use of the EFG has advancing in excess of some
become pre-restricted, with more proposals being
refused than supported. This means less appetite £15 billion.
for banks to back EFG-based deals.
So what does the future hold for SMEs
amidst all this uncertainty? How invoice finance works
Thankfully there are more flexible options for Essentially invoice financing allows businesses to
forward-looking businesses, other than traditional raise cash against the value of unpaid invoices that
bank lending. Invoice finance is growing into a they have issued. The invoice finance provider will
mainstream option. Increasing numbers of pay a proportion of the invoice, often within 24
businesses are becoming to realise they have hours, and can then, as an option, take on
a very valuable asset they could put to work to responsibility for ensuring it is settled by your
finance their growth aspirations – their invoices. customer. When the customer has paid, they
will then pay you the remainder of the invoice’s
The principle of borrowing money secured on a
face value, less any administration charge.
business’ assets, particularly invoices, has been
in the UK market for almost 50 years, but it’s only There are a number of significant benefits associated
in the last decade or so that the industry has really with invoice finance. In the first instance, it offers
taken off. some certainty regarding invoice payment dates.
Rather than waiting 30 or even 90 days for payment,
Statistics from the Asset Based Finance Association
you can get up to 95 per cent of the value of the
show that the UK invoice finance sector has grown
invoice within 24 hours.
by £114 billion (total client sales) between 2000
and 2009 from £77 billion to £191 billion. In the last It also provides businesses with higher levels of
year alone, nearly 46,000 businesses in the UK and working capital, an increased ability to make
Ireland have used invoice finance facilities to fund accurate financial predictions, and the opportunity
their business and improve their cash flow with the to react quickly to changes in market conditions.
industry advancing in excess of some £15 billion. Furthermore, the funding secured through invoice
financing is directly related to the strength of the
It’s an approach that is gaining government interest.
business; as a company’s order book grows, so
According to Financing a Private Sector Recovery,
too will the amount you can obtain.
published in July 2010 by the Department for
Business Innovation and Skills, invoice finance This helps to provide clients with the capital
“could play a crucial role in securing access to they need to expand efficiently, quickly and in
working capital finance during the recovery for a risk-managed manner without the expense
many businesses.” and continual need for renegotiation associated
with overdrafts.
While innovative businesses are quickly becoming
more aware of the benefits this type of funding can
bring, it’s important that more businesses across the
UK come to understand the power of invoice finance
as a smart, sensible thing to do, guaranteeing a
cash flow when you need it most.
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3. | A guide to invoice finance for growth
Looking ahead Rather than waiting 30 or
Cash flow is potentially the greatest danger area
facing firms that wish to expand in today’s business even 90 days for payment,
environment. It is vital that any growth is properly
financed, and that expansion can occur without
you can get up to 95 per
putting undue stress on existing core business cent of the value of the
activities. Given the reluctance of banks to lend,
businesses may need to consider different financing invoice within 24 hours.
options, including factoring or invoice finance.
With proper planning and some creative thinking,
relationship-based approach throughout the last
you can make the most of the opportunities for
18 months, bridging the funding gap by offering
expansion. Today, strong relationships and reliable
sustainable finance that many businesses are
delivery are more important than ever as businesses
finding more appropriate to their needs today
look at the whole value proposition when choosing
and ultimately help them meet the recovery
a financier. The Invoice and Asset Based Lending
with strength.
industry has remained consistent in its
Funding for growth case study | Sovereign Rotating Machines
One example of a company that uses invoice finance to assist its growth plans is
Sovereign Rotating Machines – an automotive parts remanufacturer, building starter
motors, alternators and ignition modules.
With travel and fleet budgets tight, purchasing a new car is a bigger decision than it used to
be for both individuals and companies. Instead, car buyers are turning to remanufactured
vehicles – cars where all the key components have been replaced and upgraded to create,
essentially, a used car with a new engine.
In tough times remanufactured vehicles represent an ideal compromise between brand new
and used cars. Because of this, Sovereign’s orders were increasing but they needed to
invest in parts and components up front to meet that demand.
Reluctant to fund an expensive bank overdraft to manage cash flow, Sovereign Rotating
Machines chose Invoice Finance. They preferred the way in which an account manager
took the time to understand the business and were able to judge the quality of the book
debt accurately. Apart from supporting stock purchases, the availability of funding meant
Sovereign was far better able to embrace new opportunities as they arose. Their orders
are increasing and the business is growing because their risk is managed and their
financing secure.
To find out more about how Close Invoice Finance can help your business
please call 0800 220 257 or visit www.closeinvoice.co.uk
Belfast | Birmingham | Brighton | Dublin | Glasgow | London | Manchester | Newbury There when it matters |3
Registered Office: Close Invoice Finance Ltd | 10 Crown Place, London EC2A 4FT
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