This week saw some exceptional work by a lender in making a formal offer to a business the day after receiving the enquiry. The facility offered is a single invoice, spot factoring one which falls, probably, into the alternative finance category.
The line between alternative finance and conventional finance is a difficult one to draw. Arguably the type of funding offered this week via a spot factoring deal is the most sensible, cost effective and suitable facility for the user so the title ‘alternative’ hardly seems appropriate.
In the example this week the borrower has a specific, construction related job, with a well credit rated customer. Terms are 60 days but the borrower has costs, both labour and supplier, which cannot be extended i.e.they need paying now.
It seems prudent and commercially sensible to use the asset created from the work done. In this case the asset is the invoice created upon completion of the job. The asset exists as the end customer confirms the work has been carried out satisfactorily and payment will be made 60 days hence. The lender takes this as security and can advance a material percentage against the invoice value enabling supplier & labour costs to be met.
Conventional facilities would be an overdraft with the amount offered dependant upon an historical valuation of business assets, possibly not including the specific job for which funding is actually needed. Consequently the term alternative finance seems a real misnomer when the facility to which it relates is clearly the most suitable.
Personal highlight of the week saw my son carry the Union Flag at Stratford’s procession to honour The Queen.