A new kind of security

Andrew Visintin investigates the advantages of invoice discounting over bank lending. Andrew Visintin is a partner at Manches & Co.

When sourcing finance, an increasing number of companies are turning away from traditional bank overdraft lending towards the more flexible options provided by invoice discounting companies, the most recent being “packaged finance”.

Receivables finance, the umbrella under which invoice discounting sits, involves a stream of receivables frozen in accounts payable to a company.

These are sold, at a discount, to the invoice discounter for immediate cash, which then provides working capital. By exploiting its book debts, a company can provide ongoing finance for itself. Invoice discounting primarily differs from factoring in that it is undisclosed to the customer's debtor.

The invoice discounting industry has enjoyed double digit growth for more than 10 years and the recent influx of US banks into the market will amplify that.

Receivables finance is also becoming an increasingly useful and important tool in the funding of management buyouts, management buyins and acquisitions. This is largely because it can provide working capital without increasing borrowing levels or diluting the equity of the business.

Invoice discounters have traditionally only provided finance against book debts. Increasingly, companies are developing a “package” of products for clients who require more finance than the 70-85 per cent of advances traditionally made against book debts.

Using the package finance approach additional finances are secured on stock, plant and machinery, and/or land and buildings. This can amount to far more than a conventional financier might provide.

In many cases the invoice discounter, backed by its parent, will look to remove the existing bank from the equation and provide a package of products for the customer, including invoice finance, credit control, creditor protection, import/export finance and stock finance.

As a result of this development, a number of invoice discounters now take full fixed and floating charges over a company's assets.

At a time when the clearing banks have experienced a marked fall in receivership, the number of receiverships involving invoice discount companies has risen, reflecting their increasing market share and approach to security taking.

However, while not afraid to appoint administrative receivers, invoice discount companies are eager to assist in the rescue and reorganisation of companies. An example of this approach can be seen in a recent case involving an insolvent printing company. The company had a turnover of £3.25m but had run into difficulties. It had a full factoring agreement.

The factor had taken a full fixed and floating charge over the assets of the company. No bank was involved.

The company approached an insolvency practitioner with a view to rescuing the business. He, in turn, approached the factor which was willing to look at reorganisation and rescue.

An administration petition was issued and the company hived off its assets into two new companies with a view to an onward sale. The new companies then entered into fresh agreements with the factor. The court sanctioned the sales prior to the section 23 meeting. All of this was achieved within an extremely tight time frame.

The factor is seeking to collect on the book debts of the old company, with the balance going to the administrator. The old company has entered into a voluntary arrangement with its creditors which will see them receiving 40p in the pound. The two new companies are continuing to trade, saving 30 jobs.

The growth of invoice discounting is to be welcomed because it provides a more flexible approach to the growing demands of industry.

What is clear is that insolvency practitioners and their advisers will find themselves becoming increasingly involved with companies using such services.

If the fixed charge on book debts (which is already under serious threat) were to fall, factoring and invoice discounting could enter an exciting period of accelerated growth.