A full order book doesn't always add up to cash in the bank, especially when customers are getting even slower to pay. And slow paying customers have brought many a good company to its knees. There may be options available even in credit crunch times.....
All those unpaid invoices on your sales ledger have value. They're debts your customers have agreed to pay. You can unlock cash from by getting an advance of an agreed percentage of the value of your outstanding sales ledger. So instead of waiting weeks or indeed months to get paid, you get immediate access to your money. And remember if you've concluded a sale, then its your money!
Put simply, invoice finance unlocks the cash tied up in your unpaid invoices - so you get fast access to the funds you need to grow your business.
It takes two main forms - debt factoring and invoice discounting.
Factoring is a funding and collections service: the factoring company acts as your credit department and chases payments for you. If you have a factoring partner that you trust and who will treat your customers with respect, this is a great way to outsource your credit control cost effectively. It also frees you up to do what you do well i.e. concentrate on growing your business.
If you still want to retain your credit control function, invoice discounting allows you to manage your sales ledger so your clients need never know you're using a third party.
Invoice finance is growing in popularity, yet many are unsure whether it is a good idea. The concept often brings to mind the days when this type of finance was used primarily for companies in financial difficulty. And its not really understood, so business owners are suspicious of it. However these products have come on in leaps and bounds and today this type of financing could be a vital part of your working capital armory. Like everything, invoice finance has both pros and cons, but often the cons are a function of it being the wrong type of finance for a particular type of business.
However in these times, it can be a panacea. There are too many good business out there that are running into trouble because their debtors are not paying on time. This can cause a good business to run into trouble even when its order books are flush. When late payments start becoming a problem it can cause a potentially fatal imbalance in a company’s cash-flow.
Invoice finance in its factoring form enables businesses to get paid on time whenever they issue an invoice. When a business signs up for a factoring facility, they submit their invoices to the factoring company, which advances a pre-agreed percentage of the invoice amount. The factoring company then chases up the customer for payment of the invoice, and once it is paid that part of the loan is completed and the difference passed on to you. Factoring has several benefits. Firstly, you can be sure of when you will be paid every time you issue an invoice and how much of the payment you will receive. This allows you to plan your cash-flow more effectively so you can cover your outgoings each week or month.
Another benefit is that the factoring company will take on the role of managing your sales ledger and chasing customers for payment. This frees up time that would have otherwise been spent on phone calls and letters to customers.
Some business owners become worried that with a third party contacting customers over payment, valuable relationships could be tainted. However, working closely with the factoring company on the nature of the communications with customers, and maintaining your own contact with customers on a regular basis ensures that there are no negative effects.
Unlike factoring, invoice discounting allows a business to keep control of its sales ledger. And companies can gain a big cash injection at a comparatively low rate of interest through invoice discounting. This could be used for growth activities.
An advantage of invoice finance as a form of borrowing is that while there is fixed service fee, the interest is only charged on advances that remain unfulfilled by customers. Therefore each time a customer pays their bill, the debt is repaid. Because of this, the amount you can borrow grows along with your business, meaning you don’t have to keep extending your overdraft or re-apply for a loan as with conventional business lending. Invoice finance has come of age. At a time when good companies are struggling to get paid on time and to raise funding for growth, this product set is a sophisticated way to allow business grow through sales. As a form of finance compared to equity release, VC or indeed traditional lending it is now a cost effective tool that has to be considered.