PrintSpeak survival guide: Invoice discounting

nil recessus carborundorum

success story...

invoice discounting

The story of a struggling printer slowly sinking into debt - until switching to invoice discounting from an independent finance company and gaining £20K per month

This printer was a general commercial outfit with 30 employees, turning over about £2.5m a year. Work was steady, but at a low margin, which left the printer vulnerable to the inefficiencies of older kit - which much of its equipment was. The company directors knew that they badly needed to reinvest to keep

the company competitive, but with margins so low, they faced an uphill struggle.

Two years before, the printer had been the subject of a management buy-in - and in common with many MBIs, the assets were used to raise the finance to enable the purchase of the business. Shortly after the MBI, the printer took on a substantial contract at a fixed price that turned out to be a loss-leader - but the drop in turnover meant the bank wasn't willing to lend any more money.

The directors recognised the need to boost cashflow in order to make some new investment, and their current bank offered them an invoice discounting facility. But the bank offered a relatively low percentage of the invoice value - about 75% - because, like all high-street banks, it had strict criteria and wasn't prepared to vary them.

Cash starvation

Although initially the printer achieved a cashflow boost by using the bank's invoice discounting service, 75% of invoice value was too low a percentage to achieve its investment aims.

The company began slowly to starve of cash. With the old equipment still in use and not generating efficiency savings for the printer, the company began to sink slowly into debt that it couldn't pay. In particular, substantial VAT arrears were run up, and the company began to fall behind on its own payments to creditors.

The extra 10% of invoice value made all the difference, working out at around £20,000 in extra cash each month

Independent cash management specialist Zest4Funding introduced the printer to an independent invoice discounting service that offered a higher advance against invoice value - 85% as opposed to the 75% that the printer had been getting from its bank.

The new invoice discounting service effectively generated more cash for the printer - 85% of the value of each already-issued invoice, and 85% of the gross invoice value of each successive invoice within 24 hours of being raised. The remaining 15% (less a discount fee) was then advanced by the invoice discounter to the printer once the invoice was paid.

Immediate result

The results were immediate and significant. The extra 10% of each invoice's value made all the difference, working out at around £20,000 in extra cash each month. This the printer used as working capital to pay off some of its outstanding creditors. It also enabled the VAT arrears to be placed into a repayment plan, and to invest in new kit.

The printer also took the opportunity to tighten up its credit control procedures, and in order to bring down its Days Sales Outstanding (or 'debtor days') it introduced the practice of prioritising debt collection activity to make sure that larger debts were collected first.

The entire process took just three weeks from first phonecall to money in the bank.

what is...

invoice discounting?

Invoice discounting is a good way to keep your cashflow liquid, explains Simon Dempsey of Zest4Funding

Invoice discounting is a type of invoice finance, which is a generic term covering both invoice discounting and factoring

The most important aspect to any business is cashflow and the ability to successfully have cash available to cover day-to-day costs. This is what enables a business to survive and to establish effective growth and development

Invoice discounting is the practice of outsourcing debt, in the form of invoices, to a factoring company. The discounter advances (typically in the independent sector; expect less from a high-street bank) 85% of the invoice value immediately, minus a service fee

Credit control is left with the printer. The benefit of this is that the invoice finance arrangement remains entirely confidential, and the arrangement becomes, in effect, simply an advance secured against the debtors' book

When the invoice is paid, the printer pays a discount fee, to the invoice discounting service

The administration or service fee is usually a fixed percentage of the gross invoice value

The discount fee covers the cost of borrowing and is typically fixed at between 2% and 3% over base rate applied over the amount of time that the invoice is outstanding

It is an effective form of funding, being a revolving facility with no arrangement fees, and as flexible as the extent of a debtors' book

who can benefit from...

invoice discounting?

All companies need good, liquid cashflow to survive, to grow and develop

The basic requirements for invoice discounting are that a company must be business-to-business focused; and it must be offering credit terms to its customers

The key benefits are that a company gets 'paid' immediately the invoice is issued; the factoring company usually carries out credit checks on customers; and in many cases, there is the option to insure debt against non-payment

Invoice discounting also works for companies who don't want to reveal that a third-party agency is managing its debt. Retaining the credit control function inhouse maintains confidentiality

Some companies that use invoice discounting negotiate discounts with their suppliers because their liquidity of cashflow means they can pay supplier invoices immediately. These discounts help to offset the cost of the invoice discounting service

Because invoice discounting involves the company carrying out its own credit control, it pays to match it with an overhaul of inhouse credit control procedures

Welcome to the PrintSpeak Printers' Survival Guide - helping you to ride out the recession

The pages of the printing trade press have recently read like a Domesday roll-call of print's great and formerly glorious. Who could have predicted the failure of Borcombe SP, Kelvin Print Group, Quebecor, Capital, Printhaus, Butler and Tanner, Celloglas and more? With margins on print lower than they've ever been, the current global economic crisis is magnifying the cracks in every print business model.

But for every bad news story, there are plenty of success stories. Here at PrintSpeak, we decided to pull together a weekly newsletter looking at printers who recently hit a sticky patch - and what pulled them through. We hope it will provide our readers with food for thought. A struggling business is not necessarily a failing one - and knowing who to call is half the battle. In the coming weeks we'll be looking at subjects including factoring, debt collection, credit management, VIAMBOs, cost rate reviewing, credit insurance, financial restructuring and more - building a library of business know-how and giving you the contacts and knowledge to ride out the recession.

Karen Charlesworth
Publisher, PrintSpeak
karen@printspeak.co.uk