FINANCE - 01.10.2012

Using your customers to raise finance

Invoice financing

We’ve previously told you about invoice financing as a way to raise cash for your company (yr.13, iss.17, pg.04, see The next step). These schemes are normally offered by banks and finance companies and while they work, they have drawbacks. They are often inflexible, involve tie-in periods, charges for early exit and can take a while before the money is available to you. So if your company needs cash quickly it might be worth taking a look at debt auctioning instead.

Scheme basics

Debt auctioning is similar to mainstream invoice financing in that it involves exchanging money owed to you by your customers for a cash advance. The lender receives their money back when your customer pays your bill. But unlike mainstream schemes the lender (often an individual or company with cash to spare) doesn’t register a charge over your company’s assets at Companies House or ask for guarantees from the directors. But there are more advantages to debt auctions than this.

Flexible source of cash

You can use auctions for as little or as much debt as you like and as often as you wish. For example, you might have a blue chip customer who always pays but takes a few months to do so. You could choose to auction only invoices you issue to this company.

Terms

Auction loans are typically short term, 30, 60 or 90 days, and so are ideal if you know you’ll have extra pressure on cash flow for a short period. For example, your annual Corporation Tax bill might fall at the same time as your next VAT payment. Or you might need to buy materials up front to fill a large order you’ve landed.

Registration

To get started you’ll need to register with an auction company. They’ll carry out credit and other checks and charge a one-off fee for this of around £300. Once registered you can auction debts at any time. The auction companies say the turnround is usually quick and the money can be in your company’s bank account within 48 hours.

Other costs

Each auction company has a slightly different method of charging for their services, but you can expect to pay a fee of around 0.5% of the debts you sell. Plus, you will, of course, need to pay the lender for making the loan. This is where auctions come into their own. You set the maximum fee you’re willing to pay and the lenders bid to undercut each other to make the deal with you. You can pick the best offer on the table.

Tip. Obviously, you can’t expect a lender to part with their money for a derisory fee. Ask the auction company for guidance on this until you get the hang of setting the right maximum fee. The success relies on you selling the debt through them, so they should be more than happy to help.

For a previous article on invoice financing (CD 14.01.02A) and for how to find debt auctioneers (CD 14.01.02B), visit http://companydirector.indicator.co.uk.