Invoice financing is well established and, indeed, a growing source of funding for start-up businesses. It can help you to create a more stable cashflow and ensure those with seasonal income can survive the early years of operation. However, this form of alternative financing can also help you during the growth stage of your business lifecycle.
Buying distressed business assets can enable you to expand your business to meet growing demand for your products or services. However, it might not be that easy to secure a loan to fund early acquisitions of this nature. This is where invoice financing comes in.
What is invoice financing?
Invoice financing also referred to as invoice factoring or invoice discounting, is the process by which a business owner ‘sells’ invoices to a financier who pays the business owner the value of the invoice up-front before collecting the debt themselves. The service allows businesses access to the cash owed to them in outstanding invoices as and when they need it, rather than waiting for the invoices to be paid – often late.
There are two main types of invoice financing and business owners are able to choose which option works for them. For example, using invoice factoring means that your customers will know you are using a factoring financier as they will take over the entire process of invoicing and collecting payments. Invoice discounting, on the other hand, allows businesses to retain control over these processes and keep their use of invoice financing under wraps.
Invoice financing does cost you money of course. Usually, the financier will take a fee based on a percentage of the value of the invoices released to you. This can be as low as around 0.5 per cent, rising to around 5 per cent, so it’s worth shopping around to find the right invoice financing partner.
Funding an acquisition with invoice financing
Although it may seem like a major departure from the usual purpose of invoice financing, using it to fund an acquisition is actually very common. Recently, there have been a number of successful acquisitions funded with the help of invoice financiers.
A buy-in-management-buy-out (BIMBO) deal has just been completed by the management team at a wholesale distributor of caravan and motorhome parts, MRDB. The existing management team at the business has bought the business from its parent company in a deal which they expect will be a great move for the future growth of the business.
The deal was only possible thanks to NatWest Bank and RBS Invoice Financing, which supported the funding of the deal alongside Duke Royalty, which provided a debt and equity financing package for the transaction.
In another example of a successful deal, invoice financing firm Close Brothers were chosen to help fund the acquisition of a haulage business whose owners were retiring. The management team used a £1.2m invoice discounting and liquidity deal to fund the purchase and now hope to make yet more purchases off the back of the successful takeover.
Close Brother stated: “The high level of cash flow advanced is unusual, yet appropriate for a lucrative firm with an exceptional sales ledger and no other debt.
“Now the transaction is complete, the new owners plan to organically grow the business and look for possible new acquisition targets.”
And it’s this capacity for creating ongoing growth opportunities that make invoice financing so popular with smaller business owners looking to expand. According to the Asset Based Financing Association, around 44,000 business in the UK use invoice financing of some kind, with around 60 per cent opting for the more discreet invoice discounting option and 40 per cent choosing invoice factoring. Of these 44,000, a third has a turnover of less than £1m and around a tenth are larger firms with turnovers of over £10m.
Purchasing distressed assets with the help of invoice financing
There is no reason why, as a successful business owner, you cannot utilise the services of an invoice financier to help fund the purchase of distressed business assets. Invoice financiers are not just great at getting money to you quickly, which will allow you to fund the acquisition of a business or assets out of administration, they can also be a helpful partner in a dealmaking process.
A good invoice financing business will help you to formulate a strategy for a deal and identify suitable opportunities for growth. They are often well-experienced in lending to businesses who are looking to expand and need the money for a deal quickly.
The recently published Close Brothers Business Barometer, which consulted 900 SMEs on why they used invoice financing, found that a quarter of smaller businesses were interested in this type of funding as it provides fast cash. We all know that when you are looking to buy a distressed business, speed is everything.
In conclusion, you may not have previously considered invoice financing as an option for funding your distressed business purchase, but perhaps you’re missing a trick. Providing your existing business is healthy and particularly if you have vast amounts of cash tied up in unpaid invoices, why not unlock this capital to help you expand your business?