Lots of businesses could benefit from the financial help of some kind, whether it’s extra funding for growth or regular cash injections to balance cash flow. Could invoice finance be the answer?
Invoice finance is growing in popularity as a simple solution to a variety of financial funding needs, yet many business owners 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 while the association doesn’t apply anymore, mud does tend to stick.
It is true that invoice finance in its two forms – Factoring and Invoice discounting has both pros and cons, but often the cons are apparent only because it turns out to be the wrong type of finance for a business.
Businesses that offer customers credit can run into trouble even when the company is performing really well. Late payment of invoices is a notorious problem in the business-to-business sector, and when it happens regularly it can cause an imbalance in a company’s cash flow.
Cash flow can bring even large companies to their knees, but it is those which rely heavily on incoming payments in order to run their business such as wholesalers who must buy more stock or recruitment consultants who must pay their temping staff who are most seriously affected.
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 (up to 85%). 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, therefore, 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 overpayment, 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.
Invoice discounting is a second variation on invoice finance, generally used by larger companies that need capital funds for growth. Unlike factoring, invoice discounting allows a business to keep control of its sales ledger.
Because larger companies generally have higher sales, they can gain a big cash injection at a comparatively low rate of interest through invoice discounting. This could be used for growth activities and even for management buy-outs or buy-ins.
An advantage of invoice finance as a form of borrowing is that while there is a 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.
The main difficulty with invoice finance is finding a lender that will work well with the needs of your business.
You need to find a company with the same attitude towards managing customers that you have and which will conduct affairs on your behalf with the same professionalism and courtesy. It also helps a great deal to work with an invoice finance company that understands the industry you operate in.
When you and your invoice finance facility aren’t a good match, problems can arise. For example, you might become concerned that the lender is approaching your customers in a way that could be damaging to your relationship with them, or that customers will worry when they receive their bill from a finance company and not directly from you.
These types of problems can be prevented before they appear, simply by choosing the right invoice finance lender and facility. Make sure you ask loads of questions in order to best understand how their business works and which type of lender your business would flourish under.
(by Rosie Beasley)