AR Cash Flow discuss importance of invoice finance

The Romans sold discounted promissory notes. American colonies, prior to the revolution used invoice finance to finance goods such as cotton being shipped from European colonies to America. During the Industrial Revolution, factors assured payment for approved customers. In the USA factoring was primarily used in the textile industry. The private factor became popular during the 60s and 70s when interest rates rose. During the 80s changes in the banking industry continued this uptrend as small business was forced to look outside of banks for funding.

Today once again banks are being forced to squeeze SMEs and only fund those businesses with profitability and substantial amounts of bricks and mortar backing. As a result, the demand for invoice finance is now stronger. As an invoice financier, the only way to fund a business that has a floating asset base (the floating asset base being the accounts receivable), is to monitor it on a day-to-day basis. The only way to monitor it daily is with a high level of interaction between the invoice financier, and the business being financed.

Banks are always looking to reduce costs and a great way to do this is to reduce the amount of interaction between the client and the bank. However, in invoice financing, this is a major problem because invoice finance is based on integrity and a good partnership.

If customers reduce the amount of interaction between the client and the financier, then this relationship becomes wide open to abuse, not only from the bank’s side, but also from the client’s side as well. What we have seen recently is, the bank comes in with a computer system that means they do not have to use people to do the integrity checks, then they lose a truck load of money, then they pull out of the market leaving their clients who do have integrity high and dry. Some of the current clients have first hand experience of this prior to becoming a client.