Dependable financing in upredictables times

Is your business bogged down with pending payments? Invoice financing, offering flexibility and solid rates, can keep your enterprise on the fast track.

Robert Keay, the managing director of Ethos Consultancy in Dubai, says his company turned to Gulf Finance.

Business at Ethos Consultancy has been picking up, but the economic downturn is still presenting it with financial problems. "Our clients are paying us, but the amount of time we had to wait to get paid had more than doubled in 2008 from the previous year," says Robert Keay, the managing director of the company, which offers customer-service consulting to banks, retail establishments and government agencies.

When a financial service that lends companies cash against pending payments began operating this year, therefore, Ethos Consultancy signed on. Gulf Finance, based in Dubai, began offering the service, known as invoice financing, in February. It makes loans backed by the borrower's receivables and helps address a company's short-term cash-flow issues to either meet its immediate financial obligations or for reinvestment into operations. Its introduction in the country comes in a timely manner because companies, especially small and medium-size businesses, are coping in a tight cash and credit environment.

Mr Keay says his company - which employs about 50 people - turned to invoice financing to cope with the delays in client payments. "At the end of each month I still have rent and salaries to pay," Mr Keay says. "So when Gulf Finance approached us in the first quarter, it was no-brainer." The emergence of invoice financing in the UAE is another example of lending companies bringing to market products and services that appeal to small and medium-size firms.

Thomas Addyman, the managing director of commercial finance at Gulf Finance, says that in the four months the company has been offering the product it has gained clients including two medical clinics and a petroleum exploration company, which opted to finance its invoices from a project in Qatar. Mr Addyman says the exploration company had spent heavily on equipment and incurred unexpected costs conducting ground tests for the Qatar project. Without invoice financing, it would have faced a lack of capital for investments.

"We released cash against its invoices, which means they were able to start other projects," he says. "This product is suitable during the downturn, because it offers the needed cash flow, and it's also good during growth because companies get capital quickly for reinvestment." Unlike a bank loan, the invoice financing service is an ongoing relationship, available to the clients at all times without the filing of additional paperwork. Danya Dougherty, the marketing manager of Gulf Finance, says her company periodically assesses its clients' invoices and finances to keep the relationships going.

Mr Keay says he chose invoice financing over a business loan from banks because it did not require collateral and was cheaper than credit card loans. "We can also choose which invoices we want to finance," he said. Gulf Finance charges 1 to 2 per cent per month on receivables-backed financing, Mr Addyman says. Each loan is considered as a separate case, ensuring the total amount is not compounded. The company typically lends its clients about 70 per cent of outstanding invoices. Mr Addyman said 100 per cent financing would be possible, but under very strict criteria.

"It would have to be obviously a very established business; there have to be no risks and the business would have to have a very strong client base out there," he says. Gulf provides the financing in two forms. One option is for a client to simply borrow against its invoices. The other option involves a client taking out a loan against an invoice and in return outsourcing the collection of the debt to Gulf Finance. Gulf does not increase its interest rate or charge an extra fee for processing the debt collection, Ms Dougherty says.

"In many cases we actually prefer to take over the collection process because it would make it a lower risk for us," she says. When Gulf Finance assume the collection process, it also accepts the risks of non-payment, Mr Addyman says. When the client retains the right to collect against the outstanding invoice, Gulf Finance expects to be repaid within four months of the loan's origination. "After 120 days we present a cheque whether the invoice has been collected or not - it's not our responsibility," Mr Addyman says.

Similar services to the ones offered by Gulf Financing, known as invoice factoring or debt factoring, are popular in many countries, such as Italy, where state institutions, in particular, have a poor record when it comes to making speedy payments. In the UK, around 60 per cent of businesses with annual turnovers of less than £1 million (Dh5.99m) use invoice factoring services. Outsourcing the collection service may not be the ideal solution for some companies, however, especially those that depend on the relationships they have formed with clients. Ehsan Fatemi, a broker at the Dubai shipping company BRS Middle East, for example, says outsourcing payment collection to a third party could harm a company's business.

"We have had our accounts for a long time, and they always have paid us, whether it was two weeks or six months," he says. "But if we had another person call and ask them for payment, that could sour our relationship." On the other hand, Ms Dougherty says, outsourcing is ideal in certain cases. "Some businesses are really transactional; they don't build a relationship with their clients. For those companies it is cheaper because they don't need to have an employee harass clients for payment."

Gulf Finance judges clients' eligibility for invoice financing based primarily on the likelihood of receiving payments on their invoices. It also studies an applicant's overall financial health and business plan. Gulf Finance examines the applicant's trade licence, memorandum of partnership and at least one year of audited financial statements, Ms Dougherty says. It also analyses a potential client's debtors and creditors, as well as their profits and losses.

It typically takes two to four weeks for Gulf Finance to determine the eligibility of an applicant, although that depends on how quickly the required documents are processed. Ms Dougherty says applicants who were not able to produce a sufficient number of documents have been denied financing. Gulf Finance is not a depository institution, and it has to borrow from the market to provide its loans, a challenging proposition in the ongoing credit crisis.

However, "we are not having any issues at the moment", Mr Addyman said. Companies looking for a rescue package to help their business stay afloat during tough times need not apply for invoice financing, according to Mr Addyman. "It is not a last-resort help," he says. "This is for a company that is growing but does not have enough cash to release." On the other hand, a service like the one provided by Gulf Finance could be the ideal solution for thriving companies experiencing cash flow problems caused by clients' late payments.