When looking to fund a business acquisition, invoice financing can provide access to immediate capital that can be used to meet the costs of buying a new company.
By using invoice financing, businesses can avoid the need to raise large amounts of debt or equity capital, which can be time-consuming and challenging to secure.
When considering invoice financing as a means of funding an acquisition, it’s important to understand how the process works. Essentially, businesses sell their outstanding invoices to a financing provider in exchange for an advance on the funds owed.
This advance is typically between 70-85% of the total value of the invoices, with the remaining balance paid once the customers have paid their bills.
The financing provider will then collect payments from the customers and charge a fee for their services, which is typically a percentage of the total value of the invoices. By using invoice financing, businesses can gain access to much-needed capital quickly, which can be used to fund the acquisition of another business and help drive growth
Funding acquisitions with invoice financing
Funding acquisitions with invoice financing is a process in which a business uses its outstanding invoices to secure funding for the acquisition of another company. This process is typically used by businesses that have a steady stream of incoming payments from customers but need immediate access to capital to fund an acquisition. The process starts with the business selling its outstanding invoices to a financing provider in exchange for an advance payment.
Once the invoices have been sold, the financing provider will pay a percentage of the invoice value, usually between 70-85%, as an advance payment to the business. This payment can be used to fund the acquisition. The remaining balance of the invoice value will be paid once the customer has paid their bill. The financing provider will then collect payments from the customer and charge a fee for their services, which is typically a percentage of the total value of the invoices. This process provides businesses with a quick and flexible way to access capital without incurring large amounts of debt or equity financing, allowing them to move forward with their acquisition plans.
Putting together a finance 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 administration. 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.
Read more about: acquisition finance and leveraged finance
Part of a wider financing package
To fund acquisitions, some companies opt for a combination of financing methods. An example of this can be seen in the case of Sullivan Street, who recently merged with ISS Facilities Services to create Tivoli Group Limited. The deal was funded through a mix of invoice discounting and asset-based borrowing, with Arbuthnot Commercial Asset Based Lending acting as the financial provider. The lending facility provided to Sullivan Street was worth approximately GBP12 million, proving that this type of funding can be useful for both larger and smaller deals.
Layton Tamberlin, the partner director of Sullivan Street, credited Arbuthnot’s “expertise, speed, and ability to deliver” as the factors that influenced their decision to work with the lender on the deal. These traits are shared by many invoice financing companies, and several business owners seeking to make acquisitions have recognized the benefits that this type of funding offers.
Today, traditional asset lending frequently involves a blend of invoice discounting with a mix of other financing options such as inventory financing, plant and machinery financing, property financing, and non-specific asset-backed term loans. This combination financing approach is commonly seen in manufacturing, service, and distribution industries where inventory plays a significant role, customers are financially stable, and there are either freehold or leasehold properties involved.
Moreover, businesses with substantial intellectual property such as patents or trademarks that can be used as collateral have the potential to secure additional funding. This type of financing can often surpass the leverage available from conventional banks or lenders, who are limited in their ability to monitor the borrower’s receivables, assets, and inventory. In addition, these lenders often have lower capital costs, enabling them to offer competitive pricing with the support of a larger collateral base.
Invoice financing is viewed as a more adaptable and customized method of acquiring the funding needed to purchase a business compared to traditional options. Banks have strict requirements and, since the economic crisis, bank loans are often not feasible for many prospective buyers.
By opting for invoice financing, businesses can obtain funding without relying on traditional banks, giving them more control over their financing choices. Instead of being a fallback option, invoice financing, especially when combined with other forms of asset lending, can actually be the best choice for businesses looking to grow and expand.
Invoice financing offers a multitude of benefits for businesses looking to fund their acquisitions. One of the major advantages is the quick and easy access to working capital, which is crucial in the process of acquiring a business. With invoice financing, businesses can leverage their outstanding invoices to get the funds they need to complete the acquisition. This eliminates the need to wait for payments from customers, thereby speeding up the process of acquiring a business.
Additionally, invoice financing is often easier to secure than traditional bank loans and provides more flexible repayment terms. By using invoice financing, businesses can also reduce their dependence on banks and take control over their financing options. Furthermore, invoice financing companies are often able to offer valuable expertise and experience in putting together the right deal, ensuring that businesses are in a strong position to secure a favourable price when making an acquisition.
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.