Cash flow finance

What is cash flow?

Cash flow is the balance of cash inflows (which usually arises from financing or operations) and cash outflows (which result from expenses or investments). For many companies cash flow consists entirely of trade debtors (that is, bills outstanding) and trade creditors (bills the company in question has yet to pay).

What is cash flow finance?

Cash flow finance is a “short-term loan providing additional cash to cover cash shortfalls in anticipation of revenue, such as the payment(s) of receivables.” For many companies, cash flow financing is used to fund operations, such as honouring salary payments, or to fund expansion. Companies raise capital from cash flows they expect to receive in the future by providing a finance provider an agreed portion of their account receivables. This enables companies to access capital today, rather than an expected date in the future.

Different forms of cash flow financing

Factoring facilities are traditional sources of increasing cash flow. Factoring of receivables is a means of freeing up capital tied up in invoices with long remittance terms. Factoring facilities are traditionally whole-turnover, whereby, the entire sales ledger of a company must flow through the factor. This can become expensive and not reflect the most cost effective solution for companies to raise their working capital. Factoring facility arrangements tend to be restrictive and entering into a whole-turnover factoring facility can lead to aggressive chasing of outstanding invoices from clients, and a loss of control of a company’s credit function.

Factors will charge an arrangement fee, a monthly service fee, late payment fees, debtor insurance fees, liquidation feeds, audit charge-backs, as well as bank transfer and other administrative fees. Most facilities are legally binding for 12-18 months with 3-6 months notice periods, or significant break fees.

Different providers for SMEs in the market

Despite the large numbers of providers of working capital finance, there is limited competition on pricing and structure of factoring facilities, primarily because all their funding comes from the same capital providers (the commercial finance divisions of the major high street banks). There is some competition on service between the independents, but once a company has signed up for 18 months, there are significant switching costs, and the factor effectively holds a monopoly over the business (the debenture entered into prevents any other funding without the factor’s prior written consent).

Traditional factoring ill-suited to cash flow requirements

A defining feature of small/medium businesses in the UK is the volatility of their monthly cash flows. With few alternatives to factoring, and overdrafts currently limited, a company who uses financing every month will incur the same fees as a company which only needs funding at certain points of decreased liquidity in the year. In other words, it is an inflexible approach to SME working capital financing.

Marketinvoice’s offering

MarketInvoice allows small/medium businesses to raise flexible working capital by auctioning selected invoices or bundles of invoices to large institutional investors when cash is needed. The MarketInvoice platform enables our clients to convert outstanding invoices into working capital with:

• NO long-term contracts
• NO personal guarantees
• NO notification to your clients
• NO whole turnover facility

Companies can register by submitting financial and customer invoicing information and then are free to use the trading platform as frequently as they desire.