Is Invoice Finance Right For Your Business Cash Flow Gaps?

Small businesses can struggle with their cash flow, particularly in the early start-up sstartup. ‘Cash is king,’ and it doesn’t matter how profitable or scalable your project or services are; to keep the business afloat, it needs a healthy cash flow position at all times.

Business outgoings usually include wages, rent, inventory, data, voice, and power services, all of which are ongoing costs needing regular payments. With stastartupsash, movements need careful management to flatten the peaks and troughs in debtors’ payments.

This article looks at several ways to keep the cash flow flowing.

There’s a ton of terminology in finance, so things often get confusing for the layperson, mainly when not every provider uses the same language for their products. While some finance companies use the umbrella term invoice financing, the same term is used in the same way as invoice discounting.

In your business, you may also use invoice discounting when you offer your client a discount for quick payment of their invoice; however, it is better known as a short-term loan product that uses the business’ accounts receivables as collateral. This type of financing is more flexible than another popular product – factoring.  Both financing products are used to steady the cash flow challenges and are particularly popular with businesses with higher margins and can, therefore, afford the services.

Invoice Discounting

Invoice financing, or discounting, is a short-term loan between the lender and the business, with the clients usually unaware of the agreement. The company can choose the invoices it wants under the contract and receives up to 95% of the invoice value as a loan. When the customer pays the invoice, the loan is repaid.

As with all loans, there is a rate of interest and sometimes a service fee. This loan has more flexibility, with a pay-as-you-go option instead of a locked-in contract. Plus, the business is holding onto its accounts payable ledger and is responsible for chasing payments.

Invoice Factoring

When using invoice factoring, your business essentially sells the invoices (accounts receivables) to a third party for a discount. The business hands over its credit control to the provider and the responsibility for chasing up payments. Your clients are fully informed of the arrangement as they will pay the factoring company, not your business. Clients can also usually pay in installments, incurring a service fee and interest rate.

Considerations

Cash flow

As we’re all aware, cash flow is the biggest company threat. Liquating your accounts receivables into instant cash can effectively overcome cash flow issues. This is why invoice financing is very popular with businesses with high sales costs.

Accessibility

Typically, invoice financing is faster and more accessible than acquiring a bank loan. Bank loans will be more cost-effective with their low rates, but they take a long time to process (over a month) and have very high credit rating standards.

In contrast, invoice factoring can happen with mediocre credit ratings and be acquired quickly (essential when cash flow is the issue).

Avoid Diluting Equity

One way many stastartupstain a cash injection is to dilute equity. Invoice discounting and factoring help raise funds while retaining equity.

Time

Believe it or not, invoice factoring may be more effective for your business than the short-term loan solution that requires you to chase up invoices. Experienced debt collectors may find themselves retrieving funds faster than you otherwise would have so that time your business has saved.

Cost

The fees can be high,, so consider the options before signing an agreement. A business loan will incur fewer fees and interest rates.

Manage Customers Expectations

When you use a factoring company, your business will need to manage customer expectations with invoices and payments. Your approach to debt collection is likely to be less assertive, and you will need to seek to understand how it’s working out for them so your business gets their repeat business.

Future Borrowing

Banks and investors may be deterred by your use of invoice financing and factoring, as it can be seen as a sign of a struggling business.

Summary

Your business may use factoring and discounting services to get gear up for further investment or just through a period of trading woes. Whatever the reason, always seek expert advice before signing anything.