No better time to consider confidential invoice discounting

So advises Michael Clough, Corporate Finance Manager at the Birmingham office of RSM Bentley Jennison.

For those of your clients which have a well run sales and invoice system, make sales on credit terms and don't raise sale or return or stage payments against contracts, then confidential invoice discounting (CID) may prove an excellent funding option.

If you, for example, have a client that is poised for expansion or are part of an MBO or MBI team, CID is increasingly being used as an integral part of the overall funding package.

This is because it operates as a revolving facility, offering a flexible borrowing capacity which is ideally suited to funding working capital requirements.

In addition CID provides a well-oiled financial review system which means financiers can assess a business's risk profile and make a rapid decision - often within 48 hours following their review.

The level of finance provided can be up to 95 per cent of outstanding invoices - the percentage available will vary dependant on the type of business and the specific needs of the business.

In some cases, usually to assist in an acquisition, the lender may advance a 100 per cent lend, reducing steadily down to their normal levels over three to six months - sometimes longer.

Assistance like this can make the difference in tightly - funded MBO/ MBI and should be given serious consideration.

Key benefits of using CID:

So what other benefits might accrue using CID? A key benefit is the word "confidential". The transparency of the system means that many clients who would previously have been obliged to choose factoring can now manage their own debtors' ledger - a significant benefit for clients who do not wish their clients to know they use invoice finance.

Having a close relationship with a financial institution can also give your SME clients access to other useful financial products.

In particular, credit assessments, legal services and credit insurance. It may be possible to access these types of products on an ad hoc basis, which would be more flexible and obviously less expensive.

Flexibility is the key word though. The amount of money available to any business is directly dependent on the value of its sales. So, if sales increase then the available drawdown will increase, thereby providing your client with the funds to manufacture or purchase more stock to increase sales again.

This arrangement is often superior to a fixed loan facility with fixed interest and capital repayment terms or, indeed, a standard overdraft, which is always subject to a cap. With CID, by comparison the funds available are directly linked to sales. This means that CID is ideally suited to a rapidly expanding business.

Considerations:

What does a CID provider want in return? Firstly they may want a first charge on the company's book debts and usually a full fixed and floating charge over the remaining assets as well, although they are usually prepared for a fixed and floating charge to rank behind an existing finance provider.

The financing provider, in turn, will usually allow a CID provider first security over book debts run ahead of its own security, but in some cases the funding provider may seek to adjust the existing funding facility.

However, this should be more than compensated for by the new facility offered by the CID provider, and should be explored with the funding provider at the earliest opportunity.

Secondly, before advising your client to consider CID, you should establish what they want to do with the funds. CID can be an excellent source of funds for working capital but generally not for capital expenditure which is better suited to traditional bank loans or HP.

How much might it cost? That will depend on how big and how well run your client's business is. There are usually three types of cost. There is a service charge or handling fee based on the value of each credit invoice raised. The cost typically starts from around 0.10 per cent on each invoice.

Then there is the cost of using the funds based on the amount the CID provider has advanced. Typically this will be between 1.5 per cent and two per cent above base rate.

Finally, most CID providers have a suite of fees relating to collection of money, overdue invoices and so on. It is best to request a clear indication of these during the initial discussion process.

CID should be high on your agenda if you are looking to advise clients on seeking a flexible and simple method of raising working capital finance and in today's competitive market there has never been a better time to seek this type of product.

If you'd like to find out more about how Close's portfolio of invoice discounting and factoring services can support your business please visit www.closeinvoice.co.uk or call 0800 220 257 to discuss your requirements.