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The rise of factoring and its younger relation, invoice discounting, has helped thousands of print businesses to release funds tied up in unpaid invoices. Both services provide a fast repayment against the sales ledger, thereby increasing working capital and improving cashflow, with the major difference being that invoice discounting is confidential and factoring is not.

However, the events of the past two years have led some to question whether these financial instruments are actually doing more harm than good in the industry.

"Confidential invoice discounting (CID) was designed for growing businesses, providing working capital to fund growth," says Richmond Capital Partners chief executive Paul Holohan. "Unfortunately, the very nature of the print industry, with its fluctuating turnover pattern, often makes CID a poor option."

While the inherently cyclical nature of print sales is nothing new, the economic climate of the past two years has exacerbated its effect. "If a company using CID has two consecutive poor invoice months, it can leave it very short of funds," says Holohan.

Gerry Hoare, of advisory boutique Deal Bureau, agrees CID holds an inherent risk if a business becomes stagnant, or worse, starts to contract. "If a funder sees this happening the chances are they will reduce the advance rates thereby accentuating the problem and invariably precipitating the demise of the company," he says.

It is not just SME printers who are having to face up to the pitfalls of CID. According to its most recent accounts, for the year ending 30 June 2009, Dsicmm was faced with short-term financial difficulties that "principally arose in 2008 due to the use of invoice discounting facilities to finance planned long-term capital projects".

This is noted in the independent auditors’ report, which goes on to point out that the result of Dsicmm’s financing arrangements was net current liabilities of £12.3m – that’s £2.1m more than TPF Group managed to accumulate prior to its demise.

Financing pitfalls
Any potential problems that this could have led to for Dsicmm have thankfully been averted, following the company’s acquisition by   US-based DST Systems.

However, the situation Dsicmm found itself in is not unique, arising as it did from the Credit Crunch.

Using CID to fund its long-term investment – the company’s £10m move to a single ‘supersite’ in Dagenham, Essex – was necessitated by the Credit Crunch, which made it nigh on impossible to obtain the kind of long-term project funding Dsicmm would doubtless have preferred.

This left it with option B: "If a company has little or no debt, it can use CID to get a one-off benefit in releasing cash from the sales ledger to fund larger projects," says Hoare. "However, this is not ideal."

Jamie Nelson, of Compass Business Finance, adds: "For an organically growing company, increasing within its own means, CID will allow better cashflow management to facilitate that growth. But, if you’re raising money against debtors on an acquisition, you’ve got to be a 100% sure of your cashflow."

Whatever problems Dsicmm may have faced given normal trading conditions, they will have been exaggerated by the recession, particularly the speed with which clients paid their bills.

"Once a debt goes over a certain age, which could be a maximum of 120 days, that will come off your  availability, reducing the size of the facility," says Nelson. "If you’re turning debt slowly and have an invoice finance facility, that puts extra pressure on you."

A quick comparison of Dsicmm’s most recent accounts with those from 2007 suggests that debtor days have gone from around 70 three years ago to pushing 120 days in 2009. This is not unusual for any company in the sector in this period.
Even without late payment problems, most CID facilities will have been revised downwards due to the falling creditworthiness of the companies on the sales ledger.

Knock-on effects
It is interesting to see how the knock-on effect from CID will have affected almost all companies in the sector, regardless of whether they have such a facility themselves or not.

"There is a tendency [when CID users come up against a bad sales month] to undertake large print jobs at low prices, even at cost, for cashflow reasons," explains Holohan.

Anecdotal evidence would certainly support this theory. Almost every article about struggling printers in recent years has been accompanied by attendant rumours of work being carried out at uneconomical prices, by directors who were chasing turnover regardless of margin.

"CID is not benefiting a large proportion of print businesses. We really do need a new instrument providing new methods to fund working capital," says Holohan.

What this facility would be is open to debate, although several finance brokers have suggested a form of CID with an inbuilt fail-safe – a requirement for 20% of the value returned against invoices to be held in a reserve fund to tide over poor months.

This would still free up working capital for growing businesses but – capturing the zeitgeist for fiscal responsibility – it would simultaneously require that money be set aside for a rainy day.