Invoice finance, while a legitimate alternative source of income for firms that cannot borrow through traditional means, runs the risk of pitching them into corporate insolvency if their cash flow dries up, the Treasury Select Committee has been told.
Peter Hollis of Sheffield-based chartered accountancy Hollis and Co told the committee of his concerns in an evidence session on April 29th.
“It’s a viable source of finance; in most cases it works extremely well,” Mr Hollis said.
“The one problem with that type of finance is, if the business has a fall in turnover – if it has a fallow period where sales drop for two or three months – then the facility automatically collapses, and that can pitch the business into insolvency.”
He compared this with a traditional overdraft facility, which remains in place even if turnover drops, whereas invoice finance depends on the total value of invoices issued to remain relatively constant, if the same amount is to be borrowed.
For businesses on the edge of corporate insolvency, this is likely to be an existing concern – and prompt insolvency advice could be the key to finding alternative funding methods in order to smooth out turbulent cash flow conditions.
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