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A discount that fits the bill

An innovative type of financing from the US is in vogue for small firms. All you need is a positive bank, says Roger Trapp
Roy Moed got his start in business in 1978, when he noticed that a dairy supplying an airline with fruit juices did not heed a customer's request for greater variety. He seized on the opportunity, and with pounds 4,800 of capital, started work in one room with a partner.

Earlier this year, with staff numbering 400 and output having expanded from 3,000 cups of juice a week to a range of pre-packed products for in-flight meals, his company - Pourshins - acquired a leading European distributor of US drinks and foods to airlines.

Since this expanded the company, based close to Heathrow, by about 25 per cent - from annual turnover of pounds 32m to pounds 40m - Mr Moed anticipateda greater strain on Pourshins' working capital requirement. In addition, Pourshins has started to supply sandwiches to the French and Dutch railways. It is doing particularly brisk business on the TGV trains and on the Eurostar services linking London with Brussels and Paris via the Channel Tunnel.

"I've always been wary of bank overdrafts, which are repayable on demand, because you are very much in the bank's hands," says Mr Moed.

A situation like his required a more flexible arrangement, he adds, and confidential invoice discounting "fitted the bill".

Details of the deal with TSB Commercial Finance took a long time to arrange, but four to five months on, Mr Moed is pleased. "They've been very positive," he says of the bank.

Like the bank, he is anxious to draw a distinction between this type of financing, whereby funds are made available on the strength of future sales projections, and the better-known factoring. "We've avoided factoring like the plague," says Mr Moed. The general requirement for a company such as his to "factor" over debts to a third party did not appeal to him.

In fact, his company does not trade with factored creditors because Mr Moed feels it is too easy to fall victim to fraud, as he did himself a few years ago. His company received an invoice which it paid without noticing the sticker on it asking for payment to be sent to a third party. That company was also then able to claim from him the amount outstanding.

By contrast, he sees invoice discounting as just a form of "flexible funding" that can be converted back to other banking facilities later if desired. Moreover, since there is no transfer of invoices, customers are unaware of the arrangement.

CS Furniture, a Sussex-based company that makes seating for such fast- food outlets as McDonalds and Kentucky Fried Chicken, has had a rather more traumatic history than Pourshins, but is similarly pleased with the way that invoice discounting has helped.

John Lewis, managing director, says: "TSB Commercial Finance are on the same wavelength as us. They tailored a package for us. Their packaged finance concept is very flexible. It provides cash linked directly to sales, and it doesn't require a personal guarantee from the directors."

This was particularly important for CS Furniture since the directors were seeking to rebuild the business following a rapid fall in sales on the back of the high street recession. The company formed in 1978 to provide interiors for the first McDonalds sites in the UK, and by 1991, had grown to employ 105 staff and achieve a turnover of pounds 6.2m. A cutback in high- street capital spending knocked turnover down by pounds 3m in 18 months, and although the company sought to control costs, the bank stepped in to appoint a receiver.

A tense week of negotiations concluded with the directors buying the business from the receiver and setting out to rebuild it. TSB stepped in when a working capital shortage prevented expansion.

The banks, which had also suffered during the recession, were reluctant to provide cash against future orders, so Mr Lewis thought US-style invoice discounting, which he had come across when working in California, might provide a solution.

Figures from the Association of British Factors and Discounters published last week show that small and medium-sized firms using factors and discounters have grown by an average of 8.3 per cent over the past year. The same figures show that in the first half of this year, members of the ABFD discounted invoices worth pounds 14.3bn - 28.1 per cent more than last year.

Murray Chisholm, marketing director at TSB Commercial Finance, said there was still huge potential. Take-up was still a long way off that achieved in the US.

But with outsourcing continuing to be a popular management technique, he encouraged companies to see factoring as "one way of outsourcing credit control and sales ledger management".