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Management Insight: Introducing Invoice Discounting

By Jeff Delpeche

Invoice discounting is capable of playing a much greater part in the financial growth of businesses as it is the one product which is relevant and responsive to their needs.

It is a fact that a high proportion of entrepreneurial-owned businesses have limited capital with which to finance their activities. Individuals who possess many of the attributes necessary to become owners of a successful business are inhibited and frustrated by their inability to invest or raise the capital they need to finance their operation, or to gear it in line with accepted financial ratios.
A characteristic of growing businesses is the high level of energy and productivity generated by a small core of key people who lack the formal structure and bureaucracy of the large corporates. This energy and productivity can be potent forces when harnessed to the appropriate type and level of funding. They can also just as easily fizzle out when denied opportunities.

Most growing businesses find themselves having to contend with the challenges of increasing turnovers, which usually means increasing capital tied up in debtors and stocks, while performing the near impossible task of keeping customers, trade creditors and financiers happy.
Financing growth is a compelling and continuing obsession for every business.
The accepted financing route for the majority of businesses is a bank overdraft and this orthodox funding facility can be the correct solution for a lot of stable, mature or low-growth corporates. For many others it is entirely inappropriate and results in businesses sacrificing or being forced to walk away from market-share, losing their entrepreneurial flair and energy and generally under-performing.

How many owners and managers of businesses with burgeoning order books have bought help from their bank manager and have been told “to consolidate”, or “you’re overtrading”? These conditioned responses are inevitably followed by a plea for more security for the bank to bolster the present level of inadequate lending.
Growing corporates need a financing facility which offers flexibility, versatility and value for security provided and, most importantly, the owners of the business or management running the business desire a relationship with a financier who is supportive, accessible, available at short notice and ready to play a consultative, not prescriptive, role.

Bank overdrafts and the structure of managing an overdraft fall well short of these needs and virility is replaced by sterility.

It is time for owners growing businesses, their financial advisors and their bankers to take an objective look at invoice discounting and to consider it as a viable alternative to traditional funding facilities.
Today’s invoice discounter is neither a venture capitalist, nor a high cost moneylender, but is probably the best suited of all financial institutions to offer positive assistance to growing businesses. My reasons for saying this are that they look for a relationship with their clients that will extend over many years and the flavour of this relationship involves them becoming a positive, unlisted partner in their client’s business.

This partnership role encompasses financial and management advice, cash flow management, credit information and credit vetting, and daily communication at all levels. In addition, the invoice discounting facility provides the means for cash flow acceleration by placing an up-front value of between 70% and 80% on the debtors’ book and all subsequent turnovers. This value is in marked contrast to the rating placed on debtors by a commercial bank, which would normally be between 20% and 30%.
This partnership role encompasses financial and management advice, cash flow management, credit information and credit vetting, and daily communication at all levels. In addition, the invoice discounting facility provides the means for cash flow acceleration by placing an up-front value of between 70% and 80% on the debtors’ book and all subsequent turnovers. This value is in marked contrast to the rating placed on debtors by a commercial bank, which would normally be between 20% and 30%.While the accelerated cash flow provides the arterial blood the business needs, there are other spin-offs that are vitally important:
• the knowledge that the business will have cash flow to keep pace with turnover;
• suppliers can be paid, better terms can be negotiated and discounts can probably be earned;
• management can get on with managing the business and not be side-tracked into providing justifications to bank managers for increased facilities;
• top class credit management, advice and information are provided to the business which will thereby reduce the risk of bad debts and increase the marketing opportunities for the business; and
• the business is given the opportunity to realise its potential and not be frustrated by a lack of history or acceptable security.

Jeff Delpeche is Regional General Manager, Debtor Finance, at Sasfin Commercial Finance. He can be contacted on mailto:jdelpeche@sasfin.com.

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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