h of’;Any business looking to expand requires access to finance. In many instances invoice finance is the best way to secure the necessary funds to do so.
The most secure funding method for growth
Unfortunately, many businesses in the UK would prefer to inject working capital into their business, utilising other forms of finance which are more expensive and do not grow in line with their business. If you have an outstanding sales ledger and are sick of waiting for clients to have to pay on time, then an invoice finance facility is the only solution we will recommend. Our job is to educate business owners on the finance available to them. We then match them to the most suitable funding solution to fix their problem.
Invoice finance is one of the most secure methods of funding available because you are borrowing against money that your business is already owed. This means that you are less likely to default as you can only borrow against your outstanding sales invoices. With invoice finance, you are borrowing against money that is already owed to you, you just do not have to wait for your client to pay. If you have got money tied up in your sales ledger and are just waiting for debtors to pay, it is the only funding tool we will ever recommend to a client. It is also the most secure form of commercial finance available.
But what forms of security will be required by invoice financiers? Here we take a look at their potential requirements, so you know where you stand if you are looking to enter a factoring or invoice discounting facility.
The Personal Guarantee
It’s common practice for invoice finance lenders to take some form of personal guarantee from the directors as a matter of good faith. Personal guarantees keep the director involved in helping the lender collect their money if there was to ever be a shortfall. When signing a personal guarantee, you are agreeing to act as a guarantor if the business cannot afford to pay its debts.
At Contact Business Finance, we often get lenders to limit the level of personal guarantee given against the maximum funding limit available. We frequently see business owners offering too much security when it comes to any type of commercial finance, not just invoice finance facilities. It is our job to act as an intermediary and get the best deal for the client; this does not just include fee structure and access to the best rates, but also the level of security that owners sometimes have to offer a lender.
The security an invoice finance lender may request varies between providers, and this is something you should give serious consideration to when choosing an invoice finance lender.
Business owners can also get personal guarantee insurance if required separately. This is a product that we are able to provide if it is required by your business.
The Performance Warranty
If lenders do not take a personal guarantee, they will often require a performance warranty. A performance warranty covers a lender if the directors of the business wrongfully breach the facility.
This entitles the factor to enforce a personal guarantee if there has been a breach of the factoring agreement. However, to recover money under warranty, the factor must go to court to prove their case that the business owners have acted wrongfully.
Debenture Charges
The majority of invoice finance lenders also take a charge on a company’s debenture. This means that they are securitising against the books the assets of the business, as this is what they are lending against.
It is not uncommon for a lender to take an all-asset debenture. It is worth noting that invoice lenders will allow other companies to have a charge if necessary. A deed of priority will be required between the lenders of who take control of what asset in the event of a collect out. This deed of priority is often required when another lender or business has charge over the business. An invoice finance lender should always have rights over the book debts, after all, this is what they are lending against.
Fixed Asset Security
This is rarely asked for and will normally only ever be requested when there is a bad credit history or past insolvency.
On occasion, invoice finance lenders might request a charge on a property, or request security over other personal assets of the business owner. This is often the case if an invoice finance lender has their concerns around the debt. For example, if the nature of the work is contractual and the client has a track record of not collecting the full invoice value from debtors in the past.
Credit Insurance / Bad Debt Protection
This is another method to safeguard a business from the effects of non-payment by debtors. This allows business owners peace of mind if a bad debt was to ever occur. For example, if a client was to go into any form of insolvency process, with a credit insurance policy, you could have all invoices outstanding to that debtor insured. Having a credit insurance policy in place not only gives your business peace of mind, but can also get the invoice finance lender to feel more comfortable about the debt they are being asked to fund.
The majority of invoice finance lenders can offer credit protection or bad debt protection alongside an invoice finance facility. The lender cannot call this credit insurance. However, depending on the lender’s policy it does often act in the same way. The lender is just allowing the client the ability to use their policy with a credit insurance provider. Fees for such credit protection are often a flat percentage per invoice, just like how the service charge works within the invoice finance industry. A benefit of having a policy with an invoice finance lender is that they can help manage the policy and reporting requirements a credit insurance provider needs.
The most common form of credit insurance is a whole turnover policy. This is where a business insures all of their invoices, subject to suitable credit protection limits being available. With an invoice lender, the fees of such policy are expressed as a percentage per invoice. With an external policy, businesses will pay a monetary value premium. We often find that larger businesses, in preferred sectors who have had little bad debt history get a better deal with an external policy directly with the credit insurer. This is something that Contact Business Finance can look at for you if you are unsure.
Selective bad debt protection allows you to only credit insure the debtors you wish to. Some business owners sometimes do not feel the need to insure their whole turnover. For example, they might be trading with a blue-chip client that is very unlikely to ever go through any form of insolvency. Selective bad debt protection with an invoice finance lender is often more expensive in terms as a percentage. However, money can be saved by paying a larger percentage if you are not having to include all turnover.
Another form of credit insurance is called a major buyer policy. This type of policy covers non-payment form your larger debtors. For example, you might want to only insure invoices outstanding to your largest debtor. This is because if they were fail, it could leave your business in a similar scenario.
Single risk cover is also available on the market. As a business you might only have one client and not be fortunate to have a widespread ledger. Unless the debtor is government-related or blue-chip, invoice finance lenders will often make it a necessity for a business insure their sales invoices if they only have one client. This is because if that client fails, the likelihood is that so will you.
Credit insurance is available for domestic debt and export debt. Please note that credit insurance is always subject to suitable credit limits being obtained.
The security advantages of invoice finance
Invoice finance is growing in popularity as a method of raising finance for many SMEs in the UK. In the first instance, it capitalises on an often-unused asset on your company’s balance sheet. Accessing funds gives an immediate boost to your cashflow and enables a business to access finance quickly when required. The event of a default is far less likely as you can only lend against your sales invoices. This means that you can only borrow up to a maximum of what you are already owed by clients in the first place.
Perhaps the greatest advantage of all is the fact that unlike a loan, an invoice finance facility grows with your business, the more you invoice, the more funds are available to help the business have working capital when required. It allows businesses to grow as fast as they like, but not too quick as they must be actively trading with debtors to have sales invoices outstanding to receive financing against. A business loan can be given out for working capital, allow a business that short-term cash injection. However, if that business loan is not used wisely and business is slow, directors still have to be able to afford the monthly payments otherwise they default.
Compared to loan providers, invoice finance lenders rarely ever enforce personal guarantees because there are more efficient ways to collect the money they have borrowed out. As opposed to legally going after a director personally. It is a quite often that a personal guarantee is the last thing to be called upon. They only crystalise if the invoice finance lender cannot collect on the invoices and the business does not have sufficient funds available.
The next step
We hope the above has given you the necessary information on different forms of security an invoice finance lender can take.
We believe that transparency is vital when it comes to the relationship between provider and client, it’s essential that the advice given is in the best interests of the client, not just good for the invoice finance lender. We provide straightforward, jargon-free advice entirely aimed at what is in the best interests of your business. We do not just look at getting clients the best rates, we take it much further by also ensuring they offer the correct level of security.
A good product is nothing without the right attitude and it is important to establish mutual trust and respect between both client and lender. This can then lead to a great relationship for the long-term benefit of both parties. We have helped many businesses already by providing the finance necessary for growth and would be delighted to help you do the same.
If you have any additional questions or wish to talk about the specific requirements of your business, please contact us and we will be pleased to help you make the decision that is best for you.