Factoring for fast cash solutions
Article Date: Jun 03 2005
High funding
‘If you require high funding, receivables is a better route than going to a bank,’ thinks Paul Williams, finance director of Healthcall Optical Services, who negotiated a 90 per cent initial facility to fund a buyout from Nestor last year.
‘A bank might lend you half, but not 90 per cent, as they don’t have a grip on what they are lending. That is the essential difference with invoice discounters. They know in detail what they are lending against. They can see what the payments are.’
Williams also used the advance to fund Healthcall’s early months of trading as an independent company. ‘You can take care of any fluctuations in trading. The limits are not absolute in terms of a fixed cash figure. It is geared entirely to what you are doing as a business. You can grow easily without having to knock on the door of the bank and renegotiate.’
Alternative to private equity
In the same way that invoice discounting is becoming an alternative to the overdraft and term loan, so Gerry Hoare is hoping that people will consider it instead of private equity.
‘Since 2001, we have been looking at alternative ways of funding transactions, such as MBOs and MBIs,’ says the managing director of Enterprise Finance Europe, which was created by the Bank of Ireland three years ago. ‘There is a move away from private equity, because of the cost and the loss of control.’
‘People have started looking round the market and have realised the benefits of using receivables to leverage the balance sheet to raise cash to complete a transaction. With rates of two per cent over base, it is a cheaper form of funding, especially for traditional companies which are owner-managed and asset-rich with little borrowing.’
In the last three years, Hoare has put together a dozen transactions with no bank loans or private equity, but is now starting to include a mix of senior debt and private equity for deals with an average size of £1.7 million with facilities ranging from £500,000 to £15 million.
‘We offer funding on the basis of trade debts, as well as plant and stock, then link to our parent bank, if there is property. We can leverage all the major assets on the balance sheet. We make sure we stay on top of forecasts, so hopefully there are no surprises for any of us.’
100 per cent facility
An advance on receivables of £2 million proved to be the only way to merge a manufacturing plant in Liverpool and a sales company in Oxfordshire to create Polythene Industries at the end of last year.
‘The cash requirement for the first six months of the new business has been intense,’ says David Rawle, the company’s new managing director, who is aiming to take sales up from £6.5 million to £11 million in the first year. ‘Funding for this growth would not have been possible without invoice discounting. We agreed an initial 100 per cent advance on our debtor book, which will gradually reduce to 85 per cent. We would certainly never have had that from a traditional source.
‘With bank finance, we would have been sitting in front of the manager every month asking him to put up the overdraft. I’d prefer not to have do that. With invoice discounters, it is more flexible.’
