Karl Hannaford of USP Packaging has had his share of success, having for years provided disposable catering products and tamper-evident containers to UK food businesses. However, the United Kingdom-based company’s bank reportedly turned down his request to finance the launch of a new range of drinking containers.
So, like a growing number of other companies seeking financial assistance, including startups, Hannaford turned to an alternative lending approach to get the funds he needed, helped by commercial finance broker Touch Financial.
"I looked at six or seven different companies, but chose Touch Financial to help me because they seemed genuinely interested in my business and what I was trying to achieve,” Hannaford said in a recent BDaily Business News article.
Touch Financial brokered a factoring package that allowed Hannaford to secure cash in advance against new invoices. Such advances usually amount to 80 percent or 90 percent of the invoice total. As such, the more invoices a company generates, the more cash is made available.
Having been turned down a loan from his bank, that represents a big difference when trying to roll out new products, not to mention pay employees, and get normal work done.
"Since I am fully occupied with managing purchasing, stock control, sales and marketing, putting in place a factoring agreement means that not only do I have cash to invest in the business, but also my administrative burden is reduced,“ Hannaford noted in the article. “There is always someone there to do credit checks, collect money and manage the books.
Many banks are not serving small businesses appropriately, according to Touch Financial Direct Simon Carter. “If you have a good business plan, and a good product to sell, then invoice finance is the easiest and fastest way to get the cash you need to succeed,” he said in the article.
A variety of companies are supporting financing based on payment of future invoices. As PYMNTS.com reported earlier this year, a startup alternative-financing company called PayPlant similarly is addressing cash-flow challenges by providing small and midsize businesses a digital invoicing service that reduces the interest on advanced funds while awaiting payment for their services.
Many smaller firms are at a disadvantage because they can’t pay employees and build up inventory while waiting to get paid, PayPlant co-CEO Ronjon Nag noted in a podcast interview with PYMNTS.com. Though some “factoring” firms will work with companies to speed up the payment process at a discount, typically 80 percent or 90 percent of the owned funds, they’ll also charge interest that can be as high as 4 percent, he said.
“At PayPlant, we’re doing it digitally, and so we’re trying to cut those rates to the 1.2 percent range,” he said. “That’s basically what invoice discounting means.”
Factoring, however, only works when clients have good credit, entrepreneur and financial specialist Marco Terry noted in a later PYMNTS.com article. The factor provider will not look at the assets of the company too closely, Terry said.
“Instead, they will look at the credit quality of your invoices,” he said. “They will only buy invoices that are payable from companies with high credit ratings.”
Factoring is not the primary option companies should consider to improve cash flow, however. Instead, they first should consider providing slow-paying customers with early-payment discounts, Terry advises.
"This is usually cheaper than factoring invoices and can work well,” he said. “Most companies offer a 2 percent discount if the client pays within 10 days. Clients like this because the discount increases their profitability. Obviously, startups like it because it improves their cash flow."