Workshop: Commercial: invoice finance

The opportunity for clients to raise funds either on mortgages or by entering into long-term loans other than at exceptionally high rates of interest, combined with the seeming reluctance of the clearing banks to extend overdraft facilities has meant clients are now looking at options which they might previously have ignored or thought wholly inappropriate to their businesses.

Such new options may be tempting but caution needs to be exercised to try to ensure that clients don’t end up taking on excessive debt at unaffordable rates.

Quite simply clients can find themselves walking into potentially very expensive deals in all innocence especially where only a flat rate of interest is shown rather than the true APR and where high arrangement fees are not uncommon.

Payday lender Wonga recently launched a loan service offering small and medium enterprises short-term loans of between £3,000 and £10,000 “within 15 minutes”. Interest rates start at 0.3% but they rise to 2% for businesses with poor credit records. There are also arrangement fees, and it has been calculated that SMEs could end up paying 106% on the sum borrowed.

There is a tried and tested alternative to such financing, which many clients have not explored and which might be suitable: invoice finance.

Invoice discounting or factoring – the more traditional name of ‘invoice finance’ – provides a short-term finance function which, if used astutely, can be more flexible than traditional forms of finance and cheaper than some of the new entrants to the market.

Invoice finance releases the monies from unpaid invoices and ensures cash flow is freely available within the business. As a subject on which lawyers are increasingly being asked to provide guidance some key points need to be kept in mind especially since a number of the agreements contain personal guarantees.

The marketing message from finance houses is simple: use invoice financing to release up to 85% value of your invoices within 14 days from invoice. While invoice discounting packages may well provide flexible finance solutions, allowing each client to retain control of the most important assets namely the sales ledger and customer base, one needs to first check to ensure the client’s bankers have not already taken a charge over book debts. Also check whether the proposed arrangements might breach other business agreements whether with another finance houses or indeed under a shareholders agreement.

You would also need to look for the min-imum period of the agreement and the notice provisions to avoid agreements rolling on for a further unexpected period: is an obligation on the client to invoice discount all their book debt or can one be selective?