How invoice finance can solve cashflow challenges

Many companies use invoice finance to keep the cash. Read how your business can do the same

Tom Baker’s company is an extreme example of the cash flow challenge faced by growing businesses. Its products are in demand for just a few weeks a year and so the problem is even more acute – but it encapsulates the chicken and egg scenario.

“We don’t have much turnover between January and August – it’s a straight line,” says Baker. “Then we start delivering like mad, but unfortunately our customers don’t like paying within 30 days – it’s usually nearer 90. They’re keen to start receiving goods in September, but are unwilling to pay until December. This leaves us with a large gap between paying both our overseas and raw materials suppliers before we receive payment from our customers.”

When Baker launched the company, which now employs 35 people, he tried the obvious route of bank funding. But as is the case for many growing businesses, the company was considered too high risk to get the overdraft facility it needed.

Get Invoice Factoring Quotes Tailored For Your Business - Start Here.

Have you used Invoice Factoring before?



“A turnover of £2m isn’t particularly well supported by an overdraft of £30,000, which was all I was offered.”

The answer to his problem was to look to invoice finance, in the form of factoring, in order to get the cash he needed for his company’s growth. “Our factor has been flexible, understands our business and works with us,” says Baker.

The arrangement is simple. The company is advanced 85% of the total of its invoices as soon as they are raised. His factor then takes on responsibility for collecting the money, saving him the need to chase the invoices. Once the debt is settled, the remaining 15% of the invoice value, less a service fee, is paid once payment is received. All but 1% of his invoices are covered.

Baker claims the Creative Christmas Company has been able to grow much faster than it would have done without the benefit of factoring. Last year turnover increased 25% on the previous year. “I’m currently sitting on £1m of stock, we’ll turnover £2m and will spend £500,000 in the next few months – thanks to factoring.”

Baker acknowledges a lingering belief that factors are seen as a last resort funding route, but says this only applied to a minority of his customers. “The perception that factors work only with companies who are about to go down has changed a lot,” says Baker. “We still have a couple of customers who refuse to work with a factor, but most of our customers are happy and respect the professionalism in the industry.”

Seasonal companies aren’t the only businesses who turn to invoice finance for growth. Recruitment is an industry that commonly struggles to manage the gap between paying temporary workers who demand weekly wages from agencies, and clients who often take months to pay.



Jared Associates is a recruitment company specialising in the civil engineering industry. In a fast-growing sector, the company realised it would never be able to achieve its growth potential on its existing bank overdraft facility.

“The steadily increasing number of temporary staff was beginning to have a huge impact on our cash flow. We found ourselves constantly trying to renegotiate our overdraft facility to cater for our needs as an expanding business,” says finance director, Jonathan Chambers. “The hassle factor was significant.”

Chambers considered persevering with the firm’s overdraft, but when its accountant recommended invoice discounting three years ago, he decided this would be a smarter option. “The most important aspect of our business is paying out a temporary payroll on time, cash transfer hiccups and last minute adjustments to availability would be very damaging.”

He says invoice discounting has smoothed out these bumps, making the monthly cash cycle run more easily. “Cash transfers are made on time and funds withheld on debts have been minimal. It’s given us a more predictable cash flow, enabling payrolls and other outgoings to be met without having to rely on our client’s promise that the cheque is in the post, while allowing us to expand the temporary staff base significantly. The overdraft route had limitations and attracting external finance would almost certainly have meant giving up equity.”

Chambers says the decision transformed the company’s ability to grow. “We now have 15 staff in our Tunbridge Wells office and have opened offices in South Africa and Australia. This is all part of our business plan to capitalise on the international migration of staff in our industry,” says Chambers.

The company’s turnover has also increased year-on-year and is expected to reach £4.5m this year.

Invoice finance is also increasingly used as an effective means of outsourcing the accounts department to minimise overheads. When Martin Brighty and David Walker launched a company selling handmade silk ties in 1996, this was a major benefit of factoring.

“To start a business in the UK you ideally need a year’s worth of money behind you. We needed £150,000 and we only had £1,000. When you’re new in business, banks don’t want to lend that amount,” says Brighty.

After exploring factoring as an alternative means of raising the finance, Brighty and Walker met with an advisor from Alex Lawrie Factors, who told them that if they came back with the orders, Alex Lawrie would come up with the money. They set off to the US, a market they identified as having huge potential, with some samples and, after securing £50,000, returned to a cash advance of £37,500 – 75% of the total outstanding invoices. So Hunters Partnership Ltd was born.


Take a look at our business finance tool to compare and assess funding solutions that could help you fund business growth

“We employed people who took four weeks to make the ties and a week later we had the money,” says Brighty.

Alex Lawrie now advances 90% of all Hunters’ outstanding invoices within 24 hours of them being raised, and the remaining balance is paid on receipt of payment.

“It works really well. We are able to outsource the whole credit control process to professionals. No security is required – we simply assign them the debtors ledger and they carry out credit checks on our customers. We can get credit references online within 20 minutes – the system is very streamlined,” says Brighty.

He estimates that factoring saves the company nearly £20,000 a year, compared to employing a credit controller, and believes that at least 30% of the working year is saved in terms of time spent managing and chasing debts. “Using a factor is nothing to be ashamed of. It shows we have the intelligence to outsource one of the most important parts of our business to professionals. We wouldn’t be in business without factoring.”

While Brighty’s point is fair, it’s a fact that corporate insolvency practitioners, in attempting to turn companies around, look to factoring as a means of introducing order to those who have let debt slip. For larger companies, the cash influx generated on invoices and assets is commonly used by turnaround specialists to bridge a shortfall, and put a company on an even keel while other changes are made to the business model. So, while such generalisations would be unfair, it can be suitable for struggling companies too.

As your business grows and evolves, invoice finance can also provide the most costeffective means of taking a new direction, whether to rescue a business or change tack. The management buy-out is a classic example.

When Sheffield-based sausage manufacturer Tranfield was being sold by its parent company in May 2003, its former managing director, Alastair MacDonald, was one of the management team keen to take control. The business has a turnover of £25m and employs 260 staff. However, the management buyout (MBO) team had one problem, they needed cash.

“We considered various options, such as mezzanine funding, but interest rates were high and you had to pay the money back at a certain time,” says MacDonald.

As a former finance director, he was familiar with invoice discounting and decided it offered the best route.

“It’s like a balloon – it inflates and goes down according to your requirements.” Through Enterprise Finance Europe, which MacDonald believed offered the most favourable rates, the MBO team raised £3m. This was based on the strength of the company’s debtor book, providing the chance to successfully implement the team’s strategic acquisition plan. The money was released on the agreed date.

“We could have carried out the MBO in other ways, but it would have meant getting involved with venture capitalists and things like that. By using invoice discounting we could retain control as well as using our own assets as opposed to someone else’s,” says MacDonald. “It gave us flexibility, which is the key to a new business because you never know what upsets might happen.”

Of course that’s also true of established businesses. When you are continually striving to anticipate market trends and opportunities to expand, risks have to be taken. But sometimes, as one printing firm, which prefers to remain anonymous discovered, they don’t always work out.

Producers of marketing collateral, this company had a steady growth rate and, in 2001, based on its expanding client base, it decided to move premises and invest in higher tech machinery. However, a subsequent downturn in the design industry meant the extra capacity wasn’t used and the anticipated growth didn’t materialise. “It left us with higher overheads without the accompanying income,” says one company director.

After going through a rationalisation plan it spotted an opportunity to increase turnover by producing print output directly to end users. It knew the company needed a funding solution to capitalise on this initiative and achieve an upturn.

“We had used another invoice finance provider in the past and understood the value the facility could bring.” As a result the company approached Enterprise Finance Europe (EFE) to support the trade cycle through the anticipated upturn and return the business to profitability. EFE provided £800,000 of refinancing based on the company’s biggest asset: its debtor book.

“It made complete sense to speak with debtor finance specialists to implement a facility that matched the fluctuating nature of the underlying asset,” says the director.

The company has since returned to profitability and has seen its turnover increase in recent months. “Without the flexibility that this facility offered we would not be making profits at this stage.”


Take a look at our business finance tool to compare and assess funding solutions that could help you fund business growth


(will not be published)