By David Brown, CEO, Oxygen Finance
I’m doubtful about recent reports of the banks promoting of invoice financing getting a cool reception, as it’s a widely adopted form of cash-flow management and is nothing new. Most small businesses will have been familiar with this form of financing for a long time, and although it is a more expensive form of borrowing than an overdraft, it’s the reduced risk for banks that is driving it. In the current economic climate where banks are increasingly risk-averse it’s not surprising that it’s being pushed more aggressively.
When credit risk insurance is in place both the banks and suppliers have the safety net in place in the event the buyer becomes insolvent. There is a trend that we have seen Post Lehman where the large credit risk insurers have removed credit risk cover almost en masse in certain major business sectors.
The removal of such key cover directly pushes the risk back to the lending banks and in a full recourse invoice discounting environment ultimately back to suppliers. Increasingly suppliers who operate in some of these difficult business sectors have found that without credit insurance they have also been unable to obtain finance through their invoice discounting facilities — a true double whammy. In any market where financial uncertainty exists the first companies to pull-out of the process are the credit risk insurers, the consequences of which are lower liquidity and higher risk for suppliers in that market.
So what are the options for businesses? Well, the real debate here is around the process of payment and it is all based on the premise that the client can pay on time. Many buyers are trying to preserve cash-flow and at the same time de-risk themselves from the banks and early payment programmes enable buying organisations to set up a payment infrastructure that is independent of banks. The buying organisation offers invited suppliers the opportunity to be paid earlier than existing terms or actual performance (e.g. on day 10 rather than day 45). In return the supplier agrees for an early payment fee to be charged against each invoice, in North West Europe this is a common approach known as Skonto which carries a discount of around 2% for a 10 day settlement. This carries benefits for both buyers and suppliers in terms of cash-flow and risk management.
In short, businesses do have other options when it comes to improving cash-flow and if invoice financing isn’t the option of choice, then they should look into and early payments programme which could benefit the whole supply chain.