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Cash flow lending is a specialised area whereby you are able to ‘release’ funds from balance sheet assets to provide additional working capital for your business. Whilst more expensive than borrowing against property security it can provide a valuable source of funds for rapidly growing businesses. Assets that can be lent against include:

• Plant & equipment
• Inventory
• Debtors (accounts receivable)
• Goodwill (limited – especially available to medical professions)

This area of lending has developed considerably over the last decade. The cost of funds is now extremely competitive especially for good established businesses. With the additional funds and flexibility it provides it should be considered by all growing and mature businesses. We recommend that you speak to one of our specialised Creative Finance Consultants to see where it may be of benefit to your business.

Plant & Equipment Finance

More information on this area can be found in the section entitled ‘Plant & Equipment Finance’.

Inventory Finance

For many businesses a significant part of their capital may become tied up in the inventory required to run their business. Inventory Finance is where a lender provides finance on a percentage of this inventory. How high or low this percentage is will be based on the nature and risk of the particular industry involved. However it represents a way to release capital that can be used by the business.

Whilst simple in theory it is not available for all types of inventory. Generally it is available to businesses that can show the following:

• Stable history of inventory as a proportion of the business
• Good inventory management systems and understanding of inventory turnover.
• The ability for the lender to resell the inventory in the event of default.

This is a specialised area and we recommend speaking to a Creative Finance consultant for more information.

Debtor Funding (Factoring / Invoice Financing)

Debtor Funding is where you are able to borrow against unpaid invoices (accounts receivable) releasing funds to your business. The cost being that you generally give up a percentage margin on your invoices but with the benefit of providing immediate cash flow. Whilst giving up a margin the benefits of having the cash funds can more than compensate for this. Examples of how it can benefit your business include:

• Ability to take advantage of supplier discounts – by having the cash flow to pay upfront you may be able to obtain discounts from your own suppliers.
  
  
• Remove the need to offer settlement discounts – instead of having to offer discounts to incentives your debtors to pay early you effectively get a 100% response by passing the invoices on to the lender without having to chase the client.
  
  
• Ability to finance growth – debt funding facilities grow in line with turnover. Thus available cash flow can keep up with a rapidly growing business or during an unexpected market upturn where obtaining standard finance would be slow or not practical.
  
  
• Finance management buyouts or takeovers – Whilst some borrowing may be available against hard assets eg Real Estate debtor funding may provide the remaining funds necessary to complete a management buyout or facilitate the pay out of an exiting partner.

The Hidden Benefit of debtor funding - Effectively outsource debt collection

One of the unfortunate realities of life is that people often do not pay their bills on time. As a business it is often difficult to find the time to provide your own efficient and professional service to monitor your debtors on an ongoing basis. This is where debtor funding may provide another unseen benefit.

Debtor funding not only provides you with immediate cash flow, in many cases the lender will also provide you the option of either continuing to collect payment of the invoices yourself or they will collect them on your behalf. Given the resources and experience of the lender they are often in a much better position to provide a professional service. Many lenders will also remain anonymous and interact with clients using your name on your behalf.

In summary the pro’s and con’s of this are:

Pro’s:

• Immediate cash flow
• Free’s up time and resources within your business from managing debtors
• Professional debt collection service at a level beyond that which you could deliver - thus enhancing the appearance of your business

Cons:

• You can lose personal contact with the client – in the event that a client is having trouble paying they may become upset if the lender becomes heavy handed in collecting payment. Accordingly it is important that both you and the lender have a clear understanding of the service level expectations. Generally it is good to have a clear agreement with the lender that if they have any problems with collection that they will come back to you before taking further action against the client – thus allowing you to manage important relationships.

Goodwill

Goodwill funding is generally only available for very specialised professions. The primary examples of this are:

• Medical professions
• Dentists
• Pharmacists
• Selected established Franchises eg McDonalds, Michelle’s Patisserie

This is a very specialised area. If you have a business or situation that may require this kind of consideration we recommend that you speak with one of our Creative Finance Consultants.