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Switching off Cash Supply Causes a Nasty Shock

Invoice finance has become a fashionable form of quasi-debt. But if the facilities suddenly end, a company’s cash buffer can deteriorate.

Photographer: Lukas Schulze/Getty Images Europe


When the global economy went into hibernation to try to halt the spread of Covid-19, companies everywhere scrambled to get their hands on cash. Banks, shareholders and governments were all tapped for money, but self-help played a big part too. Businesses tried to clear their inventories, to get paid quickly for their products and services, and to pay their bills more slowly. Do all those things and a company should have more funds in the bank to pay wages and other fixed costs — crucial if you want to survive an economic crisis of this scale.


As is so often the case, those creative types in the finance industry have come up with a smorgasbord of ways to help firms increase their cash holdings. The oldest and most common is called “factoring.” Essentially, if you’re a cash-strapped company whose customers are dragging their feet on paying their bills, no problem: A bank will give you an advance on those invoices, for a fee. Another increasingly fashionable technique is a more complicated service known as “reverse factoring” or “supply-chain finance.” This allows a company’s suppliers to get paid what they’re owed quickly. The company then refunds the finance provider at a later date.


Both these techniques — known as invoice finance — generate chunky fees for banks and fintechs such as Greensill Capital, a reverse-factoring specialist backed by SoftBank’s Vision Fund. Viewed positively, these arrangements help keep the wheels of commerce oiled, especially at a time when supply chains face massive disruption — and uncertain payment schedules — because of the pandemic. In theory, they let everyone get their money reasonably quickly. However, this is really just another kind of short-term borrowing, and one that’s not well understood by investors. It can lead to nasty surprises.


Most obviously, there’s the risk of fraud, where individuals raise finance against fake invoices. That may have contributed to the collapse of London-listed hospital operator NMC Health Plc, according to the Financial Times.


But the economic upheaval caused by the coronavirus has exposed other potential problems. If a company suddenly stops using invoice financing — either voluntarily or because their banks tighten credit terms — that can worsen its cash flow difficulties at exactly the wrong moment. This happened when British contractor Carillion Plc collapsed two years ago. Furthermore, these arrangements aren’t always disclosed in a transparent way, making it difficult to get a full picture of a company’s accounts. Consider these four examples:


ThyssenKrupp AG