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‘The use of invoice finance grows in times of economic downturn’

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Companies have historically utilised invoice finance facilities during times of economic highs and lows. We caught up with Paragon Bank’s Head of Invoice Finance Adrian Taylor about what he’s seeing from businesses as the economy slows.

What is invoice finance?

As soon as your business raises an invoice, we’ll advance up to 95% of the invoice value. When your customer pays, we’ll then send you the remaining balance of the invoice minus any fees.

There are two primary invoice finance products, invoice discounting and invoice factoring. The main difference between discounting and factoring is who undertakes primary credit control responsibility. We also offer Customer Protection to help protect our clients from the damaging effect of bad debts.

How big is the market?

Around 35,000 companies in the UK use some form of invoice finance and there is roughly a 50/50 split between those that use discount and factoring facilities. The market is around £19 billion of new facilities per year at the moment, which is down from a pre-pandemic level of approximately £23 billion, but is recovering well having experienced a material reduction during 2020.

How has the market been for invoice finance recently?

Historically, demand for invoice finance tends to be stronger in times of economic growth and downturns. During boom times, companies want to raise money quickly to fund growth and in times of slowdown, invoice finance can be used to support cashflow and to protect a business against bad debts.

Demand for invoice finance has picked up in more recent months after a quiet couple of years through the pandemic. Companies were insulated by the financial support packages offered by the Government; we are now seeing businesses return to invoice finance

What trends can you see emerging?

I believe there will be growing demand for invoice finance as we head into the winter months and the expected economic pressures created by things such as rising energy costs. We have certainly seen an upturn in the volume of invoice finance trade from our clients and new enquiries are increasing.

This will be a combination of the weaning off of the Government support schemes, but also companies getting their finance in place ahead of the tougher months in autumn and winter. Of course, there are always buying advantages for businesses that have liquidity.

What are the benefits to using invoice finance?

There are many benefits to companies using invoice finance during downturns, primarily cashflow management and smoothing out the potentially damaging impact of slow paying customers, loss of turnover or even bad debts. When choosing a provider, it is always worth a discussion with individual funders to understand how they react and support businesses in the event of declining payment trends and even bad debt.

There are many different forms of invoice finance and choosing the right one depends on the needs and financial circumstances of the individual business. For example, as I explained earlier businesses can choose to manage the sales ledger themselves or pay for the invoice finance provider to do that for them.

Many invoice finance providers, including Paragon, also offer client protection facilities, which means if a customer doesn’t pay, the business could be protected. That provides great peace of mind to our clients.

On a more positive note, it can also help a company to grow by providing an injection of cash into a business. For example, a company may be looking to acquire new assets or make an acquisition. There are opportunities of securing additional turnover during periods of economic stress, so there could be demand there.

Which sectors utilise invoice finance?

There are many sectors that routinely benefit from invoice finance such as transportation, engineering, manufacturing, distribution, plant hire and provision of services, such as the recruitment sector. Companies from these sectors will continue to be the main utilisers of this type of finance, but we may see demand growing from businesses that have yet to recognise the benefits of invoice finance.

Visit Paragon's Invoice Finance webpage to learn more about our offering.

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551