Finance for small businesses has traditionally relied heavily on banks. Often they provided a bank loan and/or an overdraft. For protection they usually took a charge over the business's assets - such as a debenture and backed up with personal guarantees from the directors. If the business had property to offer then it could take out a secured loan in the form of a commercial mortgage.
Until recently, alternatives were few, but the financial crisis that erupted in 2006/7 and lasted almost a decade and destroyed bank balance sheets put an end to the ready source of bank finance for many small companies and forced a search for alternative finance
Over the years that followed the crisis alternative finance has tried to fill the massive funding gap left by banks. One form, asset-backed lending, has been a significant fillip, especially invoice discounting and debt factoring.
These make use of a business's unpaid invoices. Though assets, they sit on the balance sheet generating no return. Selling them ahead of the invoice date generates cash that could be profitably employed. The biggest difference between the two forms is who has the job, and credit risk, of collecting the debt off the debtor?
With invoice discounting the responsibility is retained by the borrower so the lender is essentially providing a loan secured by the company's sales ledger.
Single invoice finance is a recent form of factoring.
What is an invoice?
Invoices are a form of trade receivable, i.e., they are an asset on a company's balance sheet representing money to be received by that company at some future date - at the time the debtor pays the invoice. At that time, the debtor (payer of the invoice) will no longer appear on the company's balance sheet and instead it will be replaced by an equal amount of cash (which is also an asset). There is no net increase or decrease in assets, merely conversion from one to another.
If that debtor does not pay, then the asset will be written off as a bad debt (a cost in the profit & loss account) and assets will then reduce (no cash came in). Granting time (credit) to buyers to pay for their purchases is therefore an example of credit risk for the company giving time.
If later - perhaps through credit collection procedures - the debtor pays the invoice, then the bad debt is added to the p&l as a profit (income) and cash increased by the amount received. The assets increase and are offset by an increase in profit (equity on the balance sheet). All is well again.
Selling an invoice to Cash for Invoices Limited
Before the debtor defaults, the company can sell the invoice to a company such as Cash for Invoices Limited that will offer to buy just one invoice when the company wants to sell. There is no commitment for the company to sell, and no commitment for Cash for Invoices Limited to buy. The company wants to exchange an invoice for cash - perhaps it needs the cash sooner than the invoice payment date.
Cash for Invoices Limited will make an offer after conducting due diligence on the selling company and on the debtor especially. The debtor is a key concern for Cash for Invoices Limited because if there is a subsequent default then Cash for Invoices Limited will not require the seller to buyback the invoice. The sale is therefore non-recourse and Cash for Invoices Limited has to suffer the consequences of a default. It will commence steps to recover the debt. These can include issuing letters for payment, appointing a solicitor, making a court claim, or making a claim under a credit insurance policy.
Retention to mitigate credit risk
To mitigate the potential costs of trying to recover payment on an invoice that Cash for Invoices Limited purchased but which goes into default, Cash for Invoices Limited will retain up to 10% of the value of that invoice from the purchase price. If there is no default (the debtor pays the invoice on time and in full) then Cash for Invoices Limited will pay the retention to the seller when the debtor pays the invoice.
Features of single invoice finance offered by Cash for Invoices Limited
In addition to being non-recourse, Cash for Invoices Limited does not require a commitment from the seller to sell all its invoices, nor will Cash for Invoices Limited charge an arrangement fee for a purchase. Cash for Invoices Limited will not ask for ongoing fees because there is no facility between the seller and Cash for Invoices Limited. The transaction is entered into whenever the company needs cash and Cash for Invoices Limited agrees to purchase the single invoice or multiple invoices. Compared to bank factoring facilities, Cash for Invoices Limited's single invoice finance service is far more simple and has no tie-ins and far fewer fees, just one.
Supplier invoice finance offered by Cash for Invoices Limited
Cash for Invoices Limited also helps companies who need more time. Why do they need more time? Because suppliers who have sent them an invoices are demanding payment but the company needs more time to pay.
In such situations, Cash for Invoices Limited can offer to buy the supplier single invoice for cash. That cash is paid to the supplier not to the company Cash for Invoices Limited is helping. Having got the supplier off the company's back, Cash for Invoices Limited allows the company the extra time it needs to get cash and then to use that cash to pay Cash for Invoices Limited for the supplier invoice Cash for Invoices Limited purchased.
Cash for Invoices Limited's single invoice finance service therefore helps companies (sole traders and SMEs) who either need cash or who need more time.
To find out more about Cash for Invoices Limited's single invoice finance service contact Cash for Invoices Limited.