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Invoice Finance for a Phoenix

Published on 1st November 2018 - Last update on 29th June 2020

When a slow-paying client takes even longer than usual to pay, or when a major customer goes bust with outstanding debts, the effects can be disastrous for suppliers. There’s a chain reaction when a major customer fails to pay and if your business is in that chain, your cash flow could be stretched too far. You could find yourself insolvent, through no fault of your own.

Of course, insolvency need not be the end of a business. There are insolvency professionals who can often help a business find solutions which could result in a company turnaround, paying off debts and getting itself back on its feet. However, sometimes the problems are simply too great and turning around an existing business can be impossible. In these cases, it can be necessary for the owners to start again. It can mean wiping off debts to existing suppliers - but it could allow the new business to use the customer base built up by its predecessor.

We were recently approached by this kind of ‘pheonix’ company.

What is a Phoenix company?

The term refers to a phoenix rising from the ashes, and a Phoenix business is one that has been bought out of a formal insolvency process such as administration or liquidation. This is often done by the existing directors and can be arranged early in the proceedings when it is known as a ‘Pre-pack’ sale.

It can be the basis for a fresh start, but there are some strict rules about the process. The insolvency practitioner is tasked with regaining as much money as possible for unsecured creditors, so it is only possible for directors of an insolvent company to take this route when they have clear evidence that creditor interests will be maximised.

This means that the underlying assets of the old company should be sold on at a fair price. The buyers may need to purchase the company using their own personal funds and the funds thus raised will be distributed to creditors, avoiding accusations that directors have walked away from the company’s debt. The purchase may take over all assets of the old company, and this may even include employees. Because employees are an asset of the company, their contracts of employment may be transferred over to the Phoenix company under TUPE legislation. 

There are two issues that can make a phoenix a challenging situation. The first is that the process can be called into question by creditors. Some sales have been successfully challenged in court by creditors who believe that their best interests are not being served.

But even when creditors can be certain that they are getting a fair deal, there is a second problem. The new business may have great difficulty finding funding to operate in the usual way.

Finding solutions to the Pheonix funding problem

This was the problem facing a client who came to Rangewell for help recently. Their business was in janitorial supplies. Their basic business was sound, but a large customer had gone into administration, making the problems caused by a sluggish cashflow terminal for the company itself.   

Creditors had demanded payment, and the directors found that they had no alternative to calling in an administrator. He recognised that the company was sound, and believed that a phoenix should be viable - and would offer the best opportunity for the creditors to be paid. 

The directors were able to raise sufficient funds to buy the business back, and set about putting it on a more profitable footing. One of the priorities was an Invoice Finance arrangement.

“Waiting for months for payment is not unusual in our line of business. But we could not afford to do it any more with the new company.”

An Invoice Funding solution would be essential - but there was a problem.

“We were still in a business where payments come in slowly - people don’t make a priority of paying for their cleaning supplies, unfortunately. But we knew that with Invoice Finance, slow payers would be less of a problem, particularly if we had a Factored arrangement, where our finance supplier would take care of credit control for us. But we found that Invoice Finance provers were not interested in doing business with us.”  

One of the main factors in a lender’s decision about providing finance is the credit rating of your business and, as a phoenix, the business could not offer a positive credit score. This can make getting many types of credit very difficult, or even impossible. Some finance providers will refuse to help phoenix companies until they have been trading successfully for a number of years.

Finding a solution

Our client initially found that most lenders would be unwilling to help and, those which could, would expect high rates of interest.

We searched the market for a supplier which would take a more sympathetic view. Unlike most types of finance, with Factoring the lender's decision is based on the strength of your debtors and your invoices, rather than what they may see as your own creditworthiness. This means that the financial strength and credit record of your business is less important than the creditworthiness of the customers you serve.

Our contacts across the industry meant that we could find the most suitable providers for our client. We compiled a shortlist, and spoke to those who could offer the most competitive terms.

How Factoring works

Factoring lets you use invoices from slow-paying but creditworthy commercial customers to secure credit.

You simply send a copy of every invoice you issue to the funding provider. This means that as soon as you issue an invoice your company can receive an immediate cash payment covering 80%-90% of the value of the invoice, though this amount varies with suppliers.

The finance provider takes over your debtors book, and will use their own professional credit control team to chase payments.

Once they receive payment on your behalf, a second installment will be made to you,  which will have the invoice provider’s fees deducted. These range from around 1.5% to 3% per 30 days, based on your company’s risk profile, the sector you work in and the level of the funding you have agreed.

In the case of our client, we were able to arrange an Invoice Factoring facility of £800,000, based on the turnover of the old business, and the long list of customers which were immediately available to the new business.

Getting back to business

The lender's terms were more demanding than usual, but our client agreed that they presented the best chance for the business get itself back onto a proper footing. We arranged that the costs imposed would be reviewed after six months. 

At Rangewell, we work closely with all our clients to understand their circumstances before we recommend a particular type of finance. If you want to find out what Factoring, or any other type of Invoice Finance, could do for you, talk to our experts. Our service - and their expertise - is absolutely free.

If your small business works to provide goods or services to large businesses, late payments could cause you problems. However, at Rangewell we believe that there are always solutions. Call us to see how Invoice Finance could provide the answers you need, and which type of facility is right for your business.

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Richard Mitchell

Richard Mitchell

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