Solving Cash Flow Problems with Invoice Finance

[00:00:00] Tracy Smart: Welcome back to our existing subscribers and a big welcome if you are joining us for the first time. I'm Tracy Smart and I'm joined by my co host Sam Jones. Today we're going to be talking about Invoice Finance.

[00:00:18] Sam Jones: That's right, it's a bit of a Marmite topic with a lot of my clients.

Some people love it, some people hate it, but today we've got Chris Mitcham from Ultimate Finance, who's a bit of an expert in this. He's a lot more experienced than he looks. I was on his LinkedIn profile and I figured out that there's not been a year in this millennium where he's not been working selling invoice finance.

So without further ado, Chris, do you want to say hello to everybody, introduce yourself, a bit of background?

[00:00:40] Chris Mitcham: I will, thanks Sam. Yeah, that's quite scary actually. So, 25 years this year in the industry. So, yeah, started way back in 2000 actually. So crikey. Yeah, I've been, in invoice sector ever since. So, various different companies, but been with, Ultimate Finance now for, this is, will be my seventh year this year.

[00:00:59] Sam Jones: Excellent.

[00:01:00] Tracy Smart: So tell us what Invoice Finance is and if you can explain also how it actually works because not many people really understand it.

[00:01:09] Chris Mitcham: Invoice Finance is about funding, as it says invoices. But it has to be in our sector for B2B companies. We don't fund B2C. For a lot of people, it will be when you're looking at your balance sheet and you're looking at what assets you have within that predominantly people will look at things like, any sort of plant machinery they may have, they will look at other things within that.

And often they won't look at the debtor book cause they don't perceive that as being an asset that they can fund. I think people don't realize that actually their invoices, they can generate cash from those.

So funding invoices, by the way we do it, actually generates money against those, so we're looking at funding those prior to the debtors paying for them. For example, if you raised an invoice today, you might wait 30, 60, 90 days to get that paid. What we're saying is you could give that invoice to us and we will make a prepayment against it. And effectively you can have the money today and utilise that money for whatever you need it for, rather than waiting for your clients to pay.

[00:02:12] Tracy Smart: So how much, if I was your client, how much would I expect if I gave you one of my invoices now, say, to receive, you mentioned the prepayment.

[00:02:21] Chris Mitcham: Yeah, typically we fund, invoices somewhere between 70 to 90 percent of their face value on day one, and that's the invoice including the VAT. There are differences. Different industries will get different prepayments depending on where you are. People in typically in recruitment will get a higher prepayment because the debt type is very simple.

Where the debt type is a little bit more complicated or a little bit contractual, you might find you get a slightly lower prepayment. There are obviously quirks in there as well. So, because there's different sectors, I mean, if you take a sector like construction, that's obviously completely different from raising just invoices.

In construction, we're into things like application. So, that's a different sector altogether.

[00:03:04] Tracy Smart: Just so I can get the mechanics right, so I've raised an invoice to a client, you're then going to give me between 70 and 90 percent of that immediately, What happens then? So, I guess, do I have to chase the debt? Do I have to chase the client to pay or is that something that you offer?

[00:03:19] Chris Mitcham: It depends. We offer different services.

You can have a, what's classed as a factoring service, where we do full credit control as well, so we will undertake to make phone calls, we will send chasing letters and we'll send statements. Probably when I started the majority of our industry was factoring, because it was just seen as the way to go.

Predominantly because people didn't have accounts packages, and it was just the way that the industry was going at that point in time. Nowadays, probably about 95 percent of the deals that we do are what we class as invoice discounting. Where all we're doing is providing money against invoices. Purely because people have accounts packages now.

People are running things like Sage or QuickBooks or, Xero and have their own credit controller. So they don't need us to perform that service.

[00:04:07] Tracy Smart: So, I could chase the debt myself and my client wouldn't know anything about the fact that I've factored the invoice.

[00:04:16] Chris Mitcham: Yeah. In a lot of cases, the majority of facilities now are confidential. So there's nothing that goes out from the funder to the debtors to say, this is what's happening. So even the money that's paid across goes through a separate bank account, which we often refer to as a trust account, but is in the client's name.

So it's purely a clearing account, but it's a mechanism we use to see money come in. Everything nowadays is done via a portal, so people upload invoices into a portal. So where you have an accounts package, you would be literally just uploading information directly from there into our portal, and then it repopulates our end.

It's very similar to having like an online bank account etc.

[00:04:58] Sam Jones: There's a lot of stigma, isn't there, with factoring. Some industries, everyone does it, and it's just accepted. Other people don't like people knowing that they borrowed money in this country, and so when it's disclosed, they can get quite defensive about it, and I think that's, that puts a lot of people off, doesn't it?

But, on the flip side, it can present a better relationship with their client, because you're the good guy when it comes to chasing debt, as opposed to the bank, who are gonna get on your case, and you need to pay up, otherwise Chris is gonna be on the phone sending letters.

[00:05:23] Chris Mitcham: I think it used to be a case of, almost like good cop, bad cop, and we were seen as the bad cop because we were doing the chasing, and back in the day, people used to put lovely, sort of fluorescent stickers onto invoices that said, you know, this money's due to the factoring company, and if you don't pay, the big bad factoring company's gonna come chasing, and it wasn't really like that.

But everything's changed now. I mean, I say probably about 95 percent of the market now is invoice discounting. It's all done on a confidential basis because people have their own accounts packages. So, it really has changed as a marketplace.

[00:05:57] Sam Jones: So with the mechanism of it, some people see it as robbing Peter to pay Paul. You know, your money's coming in at some point, but you're then using it early. What are the typical cases where would you see it being used? What's the beneficial use of having invoice finance?

[00:06:09] Chris Mitcham: It really is. I mean, you know, we don't say you have to use the money for this mechanism. It's not like that. It's basically using that cash better, if you like, because you know you're going to get it, but if I can get it now, I can use that for maybe things like discounts with my suppliers, you know, I can pay my wages quicker, I can, you know, pay my bills quicker, I can get on better terms with my actual suppliers.

[00:06:34] Tracy Smart: Just enhances your cash flow.

[00:06:35] Chris Mitcham: Yeah, absolutely. It makes your cash flow more level than sort of, you know, those peaks and troughs that might happen. And when you're sitting there waiting for your cash to come in and you want to, go on and do something and actually grow the business, you're constantly waiting for that money to start the next thing you're wanting to do.

Whereas what we're saying is that cash is there. Use it for whatever you need to use it for, because, it's your money. You're just accessing it quicker.

[00:07:01] Tracy Smart: So just to close the circle, what happens when the cash, when the client, ultimate client, actually then pays the money? When the invoice is paid, does that go to you?

[00:07:10] Chris Mitcham: Yes, it does. We set up a, effectively what's classed as a trust account. It's a separate bank account, which effectively, the money comes through, but it's a clearing account. And then once that money comes in, it goes from that trust account, into their bank account.

[00:07:23] Tracy Smart: So ultimately I'll get the final...

[00:07:26] Chris Mitcham: You'll get the remaining money, yes.

[00:07:28] Tracy Smart: Less your fees, I suppose.

[00:07:29] Chris Mitcham: We take our charges out monthly in arrears.

[00:07:31] Tracy Smart: One of the things I wanted to ask is about the pricing because it can be quite confusing. Can you explain how, what the cost of those funds are to your clients, how it's built up?

[00:07:44] Chris Mitcham: There's two separate charges involved on any facility. Well, there's other charges as well, but the two main charges on any invoice financed facility are service charge and discount charge. Service charge is calculated against turnover, and you can't get away from that. That will always be service charge on any invoice finance facility. As I say, it's based against turnover.

The other one is discount charge, which is the cost of borrowing money. Very similar to where you might have had previously, like an overdraft. If you work on an example of say, you raise a 100 invoice plus VAT, £120. How much of that 120 that you draw is entirely up to you.

We obviously will make a prepayment against that. So say we're giving you 80 percent that creates a balance on your online facility and then you can look at that and say well actually how much of that 96 pounds do I want to draw? Do I want to draw all of it? Do I want to draw maybe 50 percent of it? Or actually, do I not need any of it?

Because on the discount element, you only pay for what you utilise. As I say, service charge you can't get away from. That is calculated against every...

[00:08:45] Tracy Smart: So, what would I get for a service charge then?

[00:08:47] Chris Mitcham: On a factoring facility. Obviously, you're paying for the fact that we're providing credit control. So you've got a cost of credit control. You've got the cost of us sending statements and letters with, you know, full credit management service.

On invoice discount, we still have to manage the facility. We still have to monitor trends in the background. We're still making sure that, you know, the debtors are okay. We're still, there's lots of checks going on in the background that you might not see, but we are still running. So, because for us, it's all about having a long term relationship with our client.

We're monitoring debtors. We're making sure nothing untoward is happening in the background, because worst case for us is something happens with one of our client's debtors, and that has an impact onto the client's business. So, you know, we're trying to foresee any potential problem down the track.

[00:09:35] Tracy Smart: So it's basically managing the facility and then effectively, an effective interest rate isn't it, on how much you borrow.

[00:09:41] Chris Mitcham: Indeed.

[00:09:42] Sam Jones: So it's all based on the client's debtor book.

Are there any things in that might put you off, or you might encourage them to have? I know concentration is a big thing. If you're all in with one, one supplier, it's not ideal, is it?

[00:09:54] Chris Mitcham: No, I mean, you know, we're not supposed to say this anymore, but we do, you know, eggs all in one basket. It's a phrase that no one likes to use anymore, but it's fairly relevant because, technically the more debt you have with one customer, something happens to that customer. That has, is obviously going to have a knock on impact into the business.

So if you're 100 percent of yourturnover is one customer and that customer unfortunately goes bust, are you going to survive?

[00:10:18] Tracy Smart: It's about spreading your risk isn't it?

[00:10:20] Chris Mitcham: Yes. And that's what we would like to encourage our clients to do. It's not to say that it works in all cases, but there are ways of, mitigating that potential risk exposure. You can use things like bad debt protection, which is, a separate policy that you're effectively getting credit limits against customers and you're effectively saying that you can provide protection against that, customer up to a certain level.

That's one way to do it. There are other ways you can structure deals. You can use things like financial covenants. You can use things like personal guarantees, etc. Different ways of doing it. The key thing is, is we look at every deal on a case by case basis. There's no sort of one size fits all with invoiced finance and never has been. Every debtor and every customer and every director is different in a different way. And every time you go in and see a business, even though I've been doing it for 25 years, you go in and every day you go and see a business, it's different from the one you saw yesterday and the day before and the day before that everyone is different.

No two businesses are the same.

[00:11:19] Sam Jones: As the invoices get raised, and the client can draw down as much or as little as they want, I presume it works a little bit like an overdraft in that way, but I assume there's benefits to having this over an overdraft in that the amount will increase the more you invoice. Are there limits? Do you have like a ceiling for the client as to how much they can invoice up?

[00:11:36] Chris Mitcham: We do, but our ceiling is fluid, it can move. I think the key thing between invoice finance and things like an overdraft, if you think an overdraft is a set lump of cash, so it doesn't move. You'll go to the bank and the bank will say, okay, you can have, say, £50,000 for example. What happens if your business is growing?

And you start to hit your head against that £50,000. It's not taking into account the growth within your business. It's not seeing what you're doing in terms of increasing sales, etc. Whereas what our facility is doing is saying, actually, okay, your sales are here, but your sales are doing that, and what we're saying is our facility does that with you.

So it mirrors your growth. Whereas things like, I say, overdraft is a set lump of cash. And also what a lot of people will do is they'll go, okay, well, I'll go and get a loan. Loan is a very simple thing to do. I'll go and get a loan, I'll go to the bank, I'll go somewhere and get a loan. Well, loans are great at the start because, fantastic, I've got that lump of cash there, but what happens when your growth is going up and your loan is doing, well, what's it doing? It's going down.

So the gap between the two is actually getting bigger because your loan reduces. But your cash requirement is increasing because your growth is increasing.

[00:12:49] Tracy Smart: Growing businesses are where I like to think of invoice finance as being a really good solution. I mean, from your experience, where would you say invoice finance works well? What kind of businesses does it work well?

[00:13:03] Chris Mitcham: It works well across the board. Yes, growth businesses and new starts predominantly will, you know, have a cash requirement day one. Anyone that's growing, I mean, anyone that's looking to sort of almost stabilize their cash flow and, you know, and have a better cash turn within the business, if that makes sense, because we're flatlining their cash requirements, because we're mirroring to their growth periods.

[00:13:26] Tracy Smart: So is there anything you wouldn't fund then? You said you don't do B2C, but putting that to one side, is there any type of industry that doesn't work well for invoice finance?

[00:13:37] Chris Mitcham: In the old days, yes. More so now, no. I mean, people will always struggle slightly with things that are more contractual. There's not many of us in the sector that will fund things like construction debt because construction...

[00:13:49] Tracy Smart: That's a really long project, isn't it?

[00:13:50] Chris Mitcham: Yeah, construction is a different animal altogether because construction is all about applications and not invoices.

There is a common misconception about, once applications are certified that they're, that debt is absolutely fine. No, it's not quite the case. And there are other things that can happen. So I think if you're funding in the construction space, you need to be a specialist. You need to understand what you're getting yourself into.

[00:14:17] Tracy Smart: We do, but we have a specialist team that fund that and understand how that works because construction debt, if you fund it and it starts to go wrong, it can go wrong very quickly and you can lose a lot of money. You could end up with a half finished building, or whatever is the construction project, and it's difficult then for you to get your money back, isn't it?

[00:14:41] Chris Mitcham: It is because obviously you think about anything in construction, there's different stages. So you've got people obviously at the front end who are maybe digging holes in the road or, you know, actually putting the structure up. And then you've got people going into the back end who will be doing things like final fix.

So, where you are in the sort of chain will determine how quickly potentially you could get paid because at the start of a development, normally there's money swilling around because, the master contractors got money at that point, as you tend to get towards the end of a building process, the cash is maybe not so prevalent at that point in time.

[00:15:14] Tracy Smart: The bugets been used up.

[00:15:14] Chris Mitcham: Absolutely. So at that point, people tend to take longer to get paid. So it depends, but we do fund construction debt. We do fund applications. When I sort of mentioned earlier about pre payment percentages, we do fund construction but it tends to be at a lower pre payment because, it's about as high risk as it comes.

[00:15:33] Sam Jones: One thing I talk about with quite a few clients who have got this type of facility, they've had it a while, they get a bit fatigued by it. Quite often they say it's quite difficult to get out of and like any debt, you need to think about your exit. You know, a loan or asset finance, you've got a fixed term, fixed repayments, you know, after three, four, five years, you're done.

How, at some point, would you step away from invoice finance? Is there a good route to doing that?

[00:15:55] Chris Mitcham: I think it depends on a business by business basis, because every business is different and your cash requirements are going to be different. And it's whatever works for you. I mean, average lifetime for our clients is about seven years. And how you choose to wean yourself off invoice finance, there's different ways you can do it.

But the main way is you just don't borrow the money. There's no, there's no, you don't have to borrow the cash. You know, and there'll be people that don't, that will borrow money as and when they need it. There's people that borrow to pay things like VAT quarters, things like that.

There's some people that borrow every penny that is available to them as soon as it becomes available. So it's whatever works for you, but there are different ways you can do it. You can ask your funder to start reducing down your prepayment. Which is the way some do, so say if you're a 80 percent advancement, you might say okay, what I want you to do is I want you to reduce that down by 1 or 2 percent per week or per month or whatever you want to do it, however quickly you want to do, and there'll come a point where actually you might turn and say actually I don't need that anymore.

[00:16:57] Sam Jones: So it's quite easy. It's just a conversation I have quite regularly. Is it, Oh, we're stuck in it. Or I know somebody who's stuck in it. They can't get out, but actually it's just down to just managing it properly. Isn't it?

[00:17:06] Chris Mitcham: It is, and it's up to you, because, obviously, we're providing that cash to you, it's up to you to decide what you want to do with it. If you don't need it, then you're just not borrowing it. If you find you're not borrowing the funds, then, yeah, that's a conversation to have with us, and if we can help move, you know, let you leave and go, that's fine.

We're not there to hold you.

[00:17:26] Tracy Smart: If any of our listeners are going to consider invoice finance now having had an explanation of how it works, what would make a good application? What sort of information would you be looking for? What's the best way for them to get ready, I suppose to start that process?

[00:17:44] Chris Mitcham: Key thing for us is always the debtor book because that's what we're lending against. For us it would be to see a debtor ledger. And then alongside that we would want to see things like, last set of financial statements. We would like to see some management information. We'd also like to see their creditors as well. And then maybe sort of the last couple of bank statements and that gives us a good flavor for how the business is performing, what it's doing, where the cash requirement is required, any sort of potential pinch points that there might be, etc. So that's a very good start point.

Just very basic financial information but it gives us a starting point from where we can go forward from there.

[00:18:23] Tracy Smart: So I'm hearing management account, up to date financial information is really valuable to have.

[00:18:29] Chris Mitcham: It is. But when we say management accounts, we're not asking for, you know, necessary accountant prepared management accounts. Typically, we will be looking at a profit and loss and a balance sheet from their accounts package. So, information that should be readily available.

[00:18:43] Tracy Smart: And what about forecasting? Do you ask them to share forecast budgets?

[00:18:48] Chris Mitcham: We do, if they have them. It's not paramount that they do, but if they have them and they want to share that, that's fantastic. So, it really depends again on the size of the facility we're looking at. At the sort of smaller end, it's not paramount that we need forecasts. If we're obviously getting into the millions of pounds of lending, then yes, we would like to see forecasts.

Because, a £200,000 facility as opposed to a two million pound facility obviously a big difference and therefore we would like to understand where the cash is gonna go and how it's gonna be utilized.

[00:19:19] Sam Jones: So having a handle on your finances or an expert FD like Tracy would help no end.

[00:19:23] Chris Mitcham: Absolutely.

[00:19:25] Sam Jones: So if you could build your perfect customer,for your business or your product, you know, whatever industry, what would they look like?

[00:19:31] Chris Mitcham: I would love to build a perfect customer but I don't think, I don't think there is because every business is unique in its own way. What's great about this sector is that every business is unique, if everyone was the same and then we would just, everything would just be standardised and that's not how business is in the UK.

And I don't think it would make my job, you know, exciting if everything was the same. It would just be monotonous and it's not the way it is.

[00:19:59] Sam Jones: So without sounding greedy you'll fund nearly enough for everyone or at least have a look, wouldn't you?

[00:20:04] Tracy Smart: It sounds as though you can basically create a bespoke solution for, anybody's needs, as long as they're a B2B client.

But one of the things that I'm interested in, and we've asked all of our guests so far, is about all of the changes in IT and technology. How has that changed your industry, and do you think it's for the better, and how do you see it changing in the future?

[00:20:25] Chris Mitcham: We've embraced IT to a point within our sector. Go back to when I first started and sort of everything was done by factoring because people didn't have accounts packages, people weren't online with their banks. Everything was done very manual, and it difficult for funders to interrogate the data as they would like to say.

Flip that to how we are now and most people running an accounts package have, you know, the ability to see on a day to day basis what's going on with the financial side of their business, they're online with the bank, I've seen it where the accountant can go in on a daily basis and see what's going on with their client's, financials.

It's changed dramatically. All of our clients are online with us. We have a portal that we use so they can upload information into us, and they utilise it. You know, they go on there, they draw payments, they can see what cash has come into their account over the last 24 hours. We've embraced technology and things like how we send our documents out now.

[00:21:23] Tracy Smart: We send everything by e sign. We do our identity checks now via an app called Nivo where they download it, they upload their identity information into that now. One of the things I have to do is an anti money laundering. I guess it's the same type of thing when you say identity checks.

[00:21:40] Chris Mitcham: It is. I mean, in the old days, we used to have to take copies of people's passports and utility bills and, the app does it all now and it's heavily sophisticated software that can tell whether this is a true passport or it's a fake. I mean, it's unbelievable what they can do with it now.

But, yes, we've embraced technology from that side to help and improve and make things quicker. But we still retain the element of human touch. All of our clients have client managers, they have a system of client managers. We very much believe about building relationship with our clients and we do that through having that relationship.

The reason they all have two points of contact is very simple, in that client managers go out and see clients. They will sit with clients, they will talk to them about their business, they will understand how their business works, and they will have a, effectively a relationship between the two of them. There's nothing better than the client manager understanding it, because if you ring up, and you speak to someone who doesn't understand how your business works, how are you going to explain to them, I've got a cash requirement, if they don't understand how that business works.

There might be, as I say, pinch points, or something unexpected might have happened, and you need some additional support. But if they don't know your business, the likelihood is they're just going to say no. Whereas if we've been out, and we've talked to them, and we've sat down with business, and we understand how it works, and we, got under the skin of the business, and we, you know, we have a conversation. We can help if something happens.

A great example. We put a client on in our Leeds office last year. The client manager on that, her son actually plays football with the business owner's son. So they didn't know each other before and now they know each other. So they go down on a Sunday morning and they stand next to each other on the touchline and talk and didn't realize.

But so we have a very local relationship with that business and that's massive for the business because we understand how it works. They were a new start and they've grown considerably, but we've supported them every step along that. And we've increased their facility twice in the first year because we know the business and we understand it and we know the people behind it.

[00:23:48] Tracy Smart: And you build the trust, don't you? So the IT has changed things, it's made a lot of things easier, but it's still about the relationships

[00:23:55] Chris Mitcham: Absolutely. I think for us, it's all about maintaining that relationship. You could go the other way and go completely IT and not have that relationship, which is great for some people because they don't ever need that contact. But, if something happens, who are you going to speak to? You know, having that relationship and knowing that because cash flow is the key to your business. Without cash flow, your business doesn't exist.

[00:24:23] Tracy Smart: Sam, did you have a final question?

[00:24:25] Sam Jones: Well, I just noted that you can fund new starts from that, that last sentence, so that, that's excellent. So there really isn't much limit on who you can't fund, or you can fund, you can look at all sorts.

[00:24:34] Chris Mitcham: What we always say is that just speak to us. And if we can help you, we will. Absolutely. I mean, there will be instances where unfortunately we can't. But just talk to us, and if there is a way we can do something, we will.

[00:24:45] Tracy Smart: Thank you very much. I really appreciate your time.

[00:24:48] Chris Mitcham: You're more than welcome.

[00:24:48] Sam Jones: Thank you very much. That wraps up, I think, our conversation today. All our links to our LinkedIn profiles and contact details will be in the show notes on whichever platform you get your podcast from.