Using Invoice Financing to Fund Acquisitions

Funding an acquisition with the use of invoice financing may not be something you have considered before, but it’s becoming a popular way to meet the costs of buying a business.

A little about invoice financing

Invoice financing is a well-established funding tool at the business start-up stage. It can help businesses to gain a foothold in their market and survive the first year in business, which is a time when banks might not be so keen to lend.

Largely based around the idea of a business borrowing against the value of its unpaid invoices, invoice financing takes several forms but is generally used by firms to regulate their cashflow, meet their financial responsibilities and make larger purchases that are essential for growth. As well as helping businesses to grow in their early stages, once a business has reached maturity, invoice financing can also play a part in allowing a business to expand.

Although using this type of funding was seen as slightly suboptimal 20 years ago, times are changing rapidly. Alternative sources of funding - including crowdfunding, peer-to-peer lending and online-only banks - are becoming more widespread and accepted, while it’s banks that are now suffering from an image crisis.

Invoice factoring

This involves outsourcing your entire sales ledger process to a factoring company who makes the value of invoices available immediately. They then pursue debtors for the moneys owed.

Invoice discounting

A slightly ‘gentler’ version of invoice financing whereby a business retains control over their sales ledger processes and still chases up debtors themselves. As a result, customers aren’t aware a financier is involved.

Self-perpetuating growth...

In fact, using invoice financing when buying a business can help to perpetuate growth. For example: if a business borrows against the money owed by its own debtors to fund the purchase of another business, it can then use that business’s debtors to fund yet another purchase. This cycle can lead to swift expansion, like in the case of Staffing 360 Solution, a New York based recruitment firm that has been using invoice financing from HSBC to fund a series of acquisitions in the UK, intended to expand its footprint here.

The business has just announced it has extended its arrangement with HSBC, which will see it able to draw upon up to GBP20m in funding from the bank.

The Chairman and Chief Executive of Staffing 360, Brendan Flood explained: “HSBC has been a great partner by completing the transaction process in just two weeks. As a result, we have strengthened our relationship with them to allow for further future expansion within the Group.”

HSBC said it was ‘delighted’ to be offering the ‘increased funding facility’, adding that the funding is enabling Staffing 360 to ‘flourish’ in the UK.

Although it may seem like a less-conventional route to financing a deal, there have been many examples of businesses within particular industries doubling their turnover through acquisitions funded only through invoice financing.

Putting together a deal

An invoice financing arrangement takes place with the help of a financier, often in the form of an invoice factoring business. Whilst invoice factoring businesses are experts in collecting payments from debtors and handling sales ledger processes, they also often possess invaluable skills and experience in putting together the right deal to help you successfully purchase a business. For example, one factoring business helped a large national recruiter purchase a regional competitor out of bankruptcy. The invoice financing company was able to help form relationships with administrators and performed early due diligence on the target before it was even put up for sale. This ensured the purchaser was in a strong position to secure a great price when the sale finally took place.

Part of a wider financing package

Some businesses use a combination of financing routes to fund their acquisitions. For example, Sullivan Street recently took over ISS Facilities Services to form a new business called Tivoli Group Limited. They funded the deal with a combination of invoice discounting and borrowing against assets, with Arbuthnot Commercial Asset Based Lending acting as financier. The lending facility made available to Sullivan Street was worth some GBP12m, demonstrating that this type of funding can be effective for valuable deals, as well as smaller purchases.

Sullivan Street’s partner director, Layton Tamberlin, cited Arbuthnot’s “expertise, speed and ability to deliver” as reasons for working with them on the deal. Indeed, these attributes are shared by many invoice financing businesses and numerous business owners looking to make an acquisition have identified the advantages that this type of funding offers.

Traditional asset lending is now, more often than not, incorporating invoice discounting with a combination of inventory facility, plant & machinery facility, property facility and a non-specific asset-backed term loan facility.
We are seeing this combination financing approach most often used in manufacturing, services and distribution businesses where inventory is significant, customers are likely to be financially secure, and there may be freehold or leasehold premises.

In addition, businesses with strong IP (intellectual property) i.e. patents or trademarks that can be used as collateral, have scope for additional funding.

Such financing could easily exceed the leverage available from traditional banks or lenders, who don’t have the capability to monitor the receivables, assets and inventory of the borrower. Moreover, these lenders often have lower capital costs, which means that in conjunction with the support of a larger collateral base, their pricing may be very competitive.

Finally, invoice financing is also seen as a far more flexible and tailored route to securing the funding necessary to purchase a business. Banks are rigid in their criteria and, since the economic crisis, traditional bank loans are simply not an options for many potential buyers.

Invoice financing gives businesses access to funding without having to rely on banks, helping them to take more control over who they bank with.

Far from being a last resort, invoice financing, particularly in conjunction with other asset lending, could actually be the best option available to you when expanding your business.

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