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Finance Focus helps businesses navigate the ever-evolving world of finance. Each episode features expert insights, practical advice, and in-depth discussions on topics such as crowdfunding, trade finance, angel investing and debt. Hosted by Tracy Smart from The Smart Team and Sam Jones from Satellite Finance.
[00:00:00] Sam Jones: Hello, welcome to the Finance Focus Tips Under 10. This is our bonus episode following up on our feature pod on Invoice Finance.
[00:00:12] Tracy Smart: So whether you're commuting, taking a coffee break, or just have a few minutes to spare, tune in to get inspired. Chris, what are your tips that you would give potential clients, any sort of secrets or tips that you would recommend they think about before looking at invoice finance?
[00:00:30] Chris Mitcham: Be prepared. Get yourself ready. They're going to want to know financial information, they're going to want to see financial information, so have that prepared because there's nothing worse than having those conversations and they're saying, can you send me all of this information and you don't have any of it available. They're going to be asking for debtor books. They're going to want to see management information.
Do some research on what it is you're actually looking for. Do you want a full credit control service? Do you want just invoice discounting where they're just providing cash against invoices? What about things like bad debt protection? What security are they going to ask for? Are they going to want to have personal guarantees? Are you going to be happy to give personal guarantees? And if so, to what level?
What level of advancement are you looking for in terms of how much money are you expecting to get out of the facility? How much money do you actually need in terms of, where are we now, but where are we going to be maybe in 12 months time? So how big is this going to be in terms...
[00:01:31] Tracy Smart: So just think about now, think what you're going to need in future as well.
[00:01:36] Chris Mitcham: Because this is your cash flow you were talking about. So, you know, if you are coming to us for growth, where's that growth taking you? You if my turnover is a million pounds now, and it's going to be two million pounds in 12 months, how much cash am I actually going to need? What's my, growth strategy? There are different things that you need to think about, because this is all about a long term relationship for the funder.
The funder's gonna want to know, where's this going? Are we plateauing here? Or are we growing? What's behind the thinking of needing the facility? Why are we going down this road? What's behind it? If it is growth, fantastic, because that's what the funders are interested in. But it might be that you need to cash for other things. There might be an unexpected tax bill that's coming that you need additional funding for. It happens. So there might be different reasons why you need this cash.
But be prepared that the lender will want to know why and will want to then do some investigation into the business. And also, you know, the people behind it.
[00:02:34] Sam Jones: In our feature episode, we discussed different types of facility, but can you just break down very simply the difference between a factoring and a discount facility?
[00:02:43] Chris Mitcham: Credit control, very simple. Factoring, credit control is part of the facility, and invoice discounting is not.
[00:02:49] Tracy Smart: One of the things that you were mentioning just now is about unexpected events that might happen that make you, put you in a position where you might want to consider invoice finance. How quickly can you turn around a deal? So if somebody was to come to you tomorrow, typically how long would it take to go through the process to get, access to the funds?
[00:03:12] Chris Mitcham: We would normally quote a period of two to four weeks. It can be quicker, it can be slower. Again, it will depend on the size of the facility. Smaller facilities are quicker to put in place because we can do some of the work electronically. Bigger facilities, they normally require an on site survey, so it normally requires someone to go on site, do like a mini audit, so they will look at financial records, etc.
It's getting the ability to get someone in to do that, and so those deals typically will take a bit longer.
[00:03:40] Tracy Smart: So the larger the facility, then be prepared to be scrutinized a little bit more.
[00:03:44] Chris Mitcham: You will, and also the requirements from the funder will be slightly higher on a larger facility because of the sheer nature of the amount of money that's being put out the door.
[00:03:53] Tracy Smart: So, I think one thing people would be really interested in is how do we find somebody that will provide the services? Obviously you provide the services, but typically how do clients come to you?
[00:04:04] Chris Mitcham: We get, majority of our business through intermediaries and brokers. So people that work within the financial services sector, so people like Sam. They would approach us with, client details, which we would then effectively work with the likes of Sam and move forward with that. That's where we would get the majority of our business from.
[00:04:23] Tracy Smart: Okay, so if you're considering or looking at where you're going to get your additional working capital or additional cash flow, a finance broker is a good place to go then.
[00:04:32] Sam Jones: I would suggest so. You might come to me with a cash flow problem and there might be another solution. Invoice Finance might be the best one. It might be an overdraft. It might be a loan. It might be the asset. Ultimate Finance can provide quite a few of those options as well, but if it comes to the broker, we can have a look at that and use our knowledge and knowledge of the market to fit you up with the right, facility and the right lender, because that's quite important.
Just quick fire, can you do new starts?
[00:04:54] Chris Mitcham: Yes.
[00:04:54] Sam Jones: Is there a minimum turnover?
[00:04:56] Chris Mitcham: Yes.
[00:04:57] Sam Jones: What would that be?
[00:04:57] Chris Mitcham: Typically half a million.
[00:04:59] Sam Jones: Is there any physical security?
[00:05:01] Chris Mitcham: Yes.
[00:05:01] Sam Jones: Will you need a PG?
[00:05:03] Chris Mitcham: Typically yes.
[00:05:04] Sam Jones: Excellent.
[00:05:05] Chris Mitcham: But in 99.9% of cases that will be on a limited basis. So it typically is limited to 20% of the line of the size, so it is very unusual for a PG to be unlimited.
[00:05:17] Sam Jones: And that would be because your invoices, or the invoices are coming to you into the trust account, so actually you've got your security. You know that the money's coming in and you can get your hands on that if there's a problem with the debt.
[00:05:28] Chris Mitcham: If you think about most facilities, predominantly most of them are on a confidential basis, so the debtors are not aware that there is a funder in play. If anything happened to the business and the funder needed to go to the debtors and say, unfortunately, business has failed and therefore we need those debts repaid.
They wouldn't be aware the funder was actually there, so you would then be having a conversation to try and justify why you're now collecting money that they don't know why you're in the loop.
The main reason for you know, using the PG security is to keep the directors involved in the business as well. But you know, a PG is only ever a certain size anyway. So, it helps the directors keep focused on you know, helping if there is a worst case scenario,
[00:06:11] Tracy Smart: Talking of worst case scenarios, and we didn't actually talk about this in our longer episode, but from your perspective, what's the biggest risk for you as a lender in invoice finance?
[00:06:25] Chris Mitcham: Non payment of debt. It's that simple. Are the debtors going to pay? It's all about the debtor book, because that's our security. We need to make sure that debt is collectible. And if it is, then we can lend against it. If we have any concerns about the debtor book, yeah, then we shouldn't be lending against it.
And it's not often we will look at one and go, we don't think that debt's collectible. 99.9% of cases it's absolutely fine.
[00:06:48] Tracy Smart: Well, thank you very much.
[00:06:50] Sam Jones: Thank you. That wraps up our Tips Under Ten, Chris. All our links to our LinkedIn profiles and contact details will be in the show notes on whichever platform you get your podcast from.
[00:06:58] Chris Mitcham: Thank you. It's been a pleasure.