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Ben Lambert-17th Aug 2016

Financing Growth in a Digital Agency

Whilst working in marketing for over 15 years I’ve not always been in an agency. Prior to Neptik I worked in the distribution industry, marketing and selling data-com products. Both very different industries and both very differently served by the financial services sector, I can tell you.

Different how?

Where there’s a product to be sold, a transaction is made and goods are received. There’s an invoice financing service for that. When you’re delivering a service, something that’s not tangible and looking for cash-flow support, it’s always been near on impossible.

As we all know these days the Financial Conduct Authority (FCA) are ever present in the decisions being made by banks and financial lenders, that and their lowered risk thresholds have made commercial financing a different ball game from what I can remember from when selling physical products. 

From the invoice financers perspective, if a business is willing to buy goods the only other thing to make sure of is that the receiver/purchaser of the goods is indeed credit worthy. Once that’s done and an invoice is raised businesses selling products can draw down over 90% of the value of that invoice on the day they dispatch it; thus becoming cash-flow rich. The transaction is simple, the risk of fraud is minimal and that’s exactly the problem invoice finance firm’s have when it comes to advancing on invoices for services supplied, rather than product.

In essence, as an agency we sell hours. We prospect and upsell the same as any other business, we chase, collect and pay our taxes; but, we don’t supply what we sell in a box, not of sorts anyway. And, by not processing a transaction for a tangible item we are indeed raising the Invoice Financing firm’s question of: ‘how do we know the job has been done’. If you work in an agency then I hear you: ‘there’s lots of ways to prove the work’s been done’, but unfortunately the Invoice financers have not been ambitious in leading the way on invoice financing for the digital age and today digital marketing is amongst the poorest served industries by the invoice financing sector.  

Where are we now?

Let’s take a look at the situation agencies and indeed other ’service’ suppliers are in right now a little bit closer. I work in a web design agency in Brighton and as a city we have the highest density of digital businesses in the UK, plus now the highest observation tower in the world, i360! I digress, the fact is digital now equates to over 6% of the UK’s GDP and the industry as a whole has seen a staggering 10% growth in the last 5 years! So, how the hell are agencies funding their growth? Or are they not growing as quickly as they could if they sold products?

The truth is, you can’t hold back winners and if someone doesn’t see an opportunity, others will capitalise and indeed they have.

 

Over the past couple of years I’ve been checking out what’s on offer when it comes to supporting cash-flow for growth in an agency. Historically, from what I’ve learn’t you can insist on payment before launch, but that doesn’t generally go down very well and could well be the straw that breaks the camel’s back when negotiating a proposal with a client.  There’s a lot of support out there for startups in the form of government grants and loans, albeit it’s not the route we’ve taken at Neptik. Then there’s crowd funding which has been a great success in recent years and has aided many entrepreneurs, most notably for us Silo, a client of ours that’s leading the way in waste free fine dining. Whist these are all valuable sources of investment, what they are not is methods of accessing cash, essentially due to your success in the form of making a sale.

So many businesses selling services find themselves constraining growth and declining to tender for larger opportunities due to cash-flow. This eventuality has always been clear to us and not something we wanted to stunt our growth, so since day one we’ve always been trying to look a few steps ahead, simulating eventualities that come from growth and identifying bridges and contingencies so we don’t have to ‘put the breaks on’.

As a board, we did not want to seek further investment, not yet anyway, so we set about researching the market even more. It’s fair to say that Banks and other traditional invoice financing lenders have realised that digital isn’t something they can ignore anymore, but still, they falter with their inflexible terms and conditions of sale, it’s still very antiquated and hasn’t evolved to where it needs to be.

So, is there anything out there that supports cash-flow for growth that really suits the digital services market? I am very happy to say, yes there is and we’re taking full advantage of it at Neptik. It’s called invoice trading.

I would say invoice trading is the perfect way for a service based business, such as an agency to access cash-flow for growth. It is the most flexible form of Invoice financing I’ve ever come across. You literally trade invoices you’ve raised with investors; they release up to 90% of the invoice value and charge a very small percentage. The beauty is you trade the invoices you want to raise cash against, not all of them like you would with traditional Invoice financing models such as ‘factoring’. You retain ownership of the debt, so your customers pay you, not the finance company and you chase the debt, not their collections team.

There are an increasing amount of businesses offering the invoice trading facility. We use it through a company called TSG Invoice and there’s certainly no complaints yet. Don’t go just by what we say though, get on the web and check it out, it’s working for us and could really help other agencies and businesses that supply services rather than products. 

I’m very passionate about Neptik, us as a team and where were going. It would be my biggest nightmare to say we couldn’t get involved in a project due to it’s and our size. If you’ve experienced or are experiencing a similar eventuality and would like to chat feel free to get in touch, I’m all ears and always happy to help.

Ben Lambert   |  Strategy Director   |  Neptik