Invoice Finance - Explained

David Webb Bibby Financial Services

Agenda

• Invoice Finance Explained

• Basic criteria

• Product overview – how it works

• Comparison to other forms of finance

• What we need to asses a deal

• Deal terms

• Working together

• Contractual Finance – The Construction Industry

• Working internationally

• Business to Business

• Completed Works (Construction an exception)

• Invoiced in Arrears

• Terms of Trade offered

• So how does it work?

Basic Invoice Finance Criteria

• Factoring• Disclosed - The clients customers are aware of the factor• Confidential - The clients customers are unaware of the

factor• Recourse - Any losses due to customer failure to pay are

at clients risk• Non recourse - Bad debt protection is included within facility• CHOCS - Client performs own credit control function

• Invoice Discounting• Disclosed - The clients customers are aware of the discounter• Confidential - The clients customers are unaware of the discounter

See full individual product description material

Invoice Finance Products - jargon busters

• Executive summary

• Aged debtors and creditors analysis

• Financials (most recent accounts, management figs)

• Example Audit Trail (Purchase order through to invoice)

What we need to asses a deal

• Security – Debenture, Factoring Agreement, P.G’s

• Advance Level – Percentage advance against invoices

• Cost and type of Charges – Service Fee and Discount %

• Contract length - Period of agreement

Terms of the deal

• Recruitment • Transport • Printing• Manufacturing • Distribution • Business Services• Construction

Popular Industries for Invoice Finance

• Recruitment • Transport • Printing• Manufacturing • Distribution • Business Services

Success Stories

Funding comparisons

  Invoice finance(Factoring and invoice discounting)

Asset based lending

Overdraft Loan

Amount of credit available

Up to 90% of your invoices available immediately. The balance (minus our fees) is payable later

From 60% - 80% of the asset valuation

By negotiation – sometimes limited to 50% of book debt

By negotiation

Flexibility Your facility may grow in line with your sales

For stock, the amount available moves in line with your business

Limits can be increased, but this incurs extra costs. Typically re-negotiated once a year

Flexible business loans allow early repayments without penalties

Security required

On your invoices and in some cases, modest personal guarantees and / or fraud warranties

Typically, security is only required on the asset

Typically requires security, which may include a charge on property

Typically requires security, which may include a charge on property

Compare to other finance optionsHow does invoice financing measure up?

• Commission payable

Working Together

Any Questions?

Funding in the Construction

Sectors

The UK Construction Industry

• UK largest industry sector • Employs over £2m people • £100bn of turnover • Every £1 spend in construction = £2.84 increase in UK GDP • Hard hit by recession in last 24 months • Growth dependent on Govt investment (but which party?!)• 2010 – looks more positive • Various tiers of contractor / hundreds of SME contractors

What is Construction? Consists of various sectors (with numerous trade bodies): • Retail, Offices, Industrial • Utilities, Roads, Railways • Social Housing • Government Projects • Speculative Developments Within these individual sectors there are: • New Build & Refurbishment Projects • Maintenance, Repair & Refurbishment Projects

How does the industry work?

Projects are contracted out in a chain or pyramid, for example :

1. The Olympics Development Authority (ODA)

2. Main Contractor (Laing O’Rourke)

3. Sub Contractor (Often Bibby Client)

4. Sub-Sub Contractor (Often Bibby Client)

The chain can go down many more tiers depending on the project

Industry Contracts – Three main Forms

1. Lump Sum Main Contracts

• Subject to monthly valuation and certification

2. Lump Sum Sub Contracts

Subject to periodic valuation and certification can take some weeks

3. Term Main Contracts or Sub Contracts

Contracts let for a period of time and can be for many years

Issues with funding the construction sector

Construction is not a sector favoured by the mainstream banks or indeed the invoice finance industry (except Bibby!)…….but why?

• Not always easy to understand / assess risk on nature of trade • Long term contracts with onerous clauses • Debt is not “sell and forget” • Complexity of the debt – contractors often run more than one ledger • Interim billing that may only be an approximation • Management of contracting ledgers internally• Subject to UK CIS Scheme • Standard industry deductions – retention, MCD, CIS tax

Construction Finance Product – Definition

Funding to contractors by offering a percentage advance (up to 70%)

against invoices and/or uncertified applications for

payment throughout the life of a contract and/or order

Product Overview

• Release of funding against uncertified applications

• Confidential, i.e. customers not aware of Bibby’s involvement

• Funding complimentary with most industry contracts

• Fast track product for smaller contractors

• Specialist Bad debt protection

• Dedicated management unit

How does it work?

1. Review of contractor business by Bibby specialist BDM and/or QS 2. Gain clear understanding of trade sector / billing processes 3. Assess funding need 4. Assess our advance level against applications (based on sector /

risk) 5. Advance up to 70% against uncertified applications (often

confidentially)6. Manage client in dedicated construction team 7. Shadow running of client contracts by our team = visibility /

transparency 8. Embrace the sector in which our clients operate

This all results in fully informed “industry” advised lending into the construction sectors

Who can we help?

• Contractors from start up to £50m+ turnover • Funding Requirement up to £3m

• Most industry sectors where we advance against billing

• Growing companies with additional working capital needs • Often operating on restrictive bank or factoring / ID facilities

What does a typical Construction client look like?

• Sub contractor working for a main contractor / employer

• Operating under standard industry contracts and CIS Scheme

• Submits weekly / monthly applications & waits an age to get paid

• Has a working capital need not being solved by existing provider

• Needs a more flexible “industry led” funding product

What sectors have we funded?

• Plastering & Drylining• Painting & Decorating • Electrical • Ceilings & Partitions • Supply & Fit (Bathrooms, kitchens etc) • Shopfitting • Double Glazing • Commercial Tiling • Scaffolding • Air Conditioning & Ventilation

And many others………

Facility terms

• Advance Levels

• Security

• Agreement Length

• Charges

Construction Finance In Action£16m Turnover Refurbishment Contractor - £500k Confidential Construction Finance Facility

Refinance from existing funder providing additional working capital facilities against uncertified applications for payment to facilitate business growth and payment of some historic trade creditor balances  

£15m Turnover Electrical Contractor  - £500k Confidential Construction Finance Facility

Refinance from existing finance provider increasing working capital facilities against invoices and applications for payment to support the financing of newly won contracts

£1m Turnover Painting & Decorating Contractor - £100k Confidential Construction Finance Facility

Increased facility over existing bank overdraft to provide additional working capital to enable contracts to be tendered for and ultimately secured