How invoice financing, factoring and discounting can help bring positive cash flow to your business.
Can you imagine being in a situation where you are doing really well at selling your business inventory; products and services, but lacking in accumulating timely payments just because your vendors are not willing to pay you right away?
If yes, then you can probably imagine the difficulty of chasing your vendors for overdue payments. Once an SME has paid for the product or service they offer, it gets by on the cash that is left — minus the costs involved in producing, marketing, selling and distributing these products and services.
A multitude of factors can easily wipe out cash flow, from labour costs to unexpected expenses. Nearly 20% of SMEs fail in their first year of business and by the fifth year, 50% have shut their doors, proving that when cash flow dries up, the results are catastrophic.
The stress of worrying about a lack of capital in your business can delay entrepreneurs from focusing on what is really important, growing the business. Instead, they are having to worry about paying suppliers, staff, and other fundamental overheads needed to activate the day-to-day operations of the business.
This indicates that effective management of cash flow is a vital part of successful business operations and those who do not address its importance in advance and plan accordingly can suffer a significant loss in market share, which could otherwise be retained by redeeming outstanding invoices from third party financing brokerage facilities.
The only way to address cash flow gaps is to plan ahead, which prevents them from happening in advance by continuously monitoring cash flow. Well-managed cash flow is a positive indicator of overall financial health, making it easier to negotiate better payment terms and help improve the likelihood of being approved for funding.
A business that can prove they are managing their cash flow in a sustainable manner looks good both on paper and in the eyes of third parties, such as vendors or potential lenders.
A quick invoice financing overview for first-timers
Invoice financing, sometimes also recalled as ‘accounts receivable financing’, is a method to improve cash flow amid challenging credit situations, by selling invoices.
This type of finance uses invoices as a way for businesses to unlock cash tied up in invoices and therefore speeding up cash flow. This is done by selling invoices to a third party who will advance some of the funds the invoice is worth up front, for a cut of the invoice.
There are two ways to finance invoices. The first way is through a sale. Invoices can be sold to a factoring company in exchange for an immediate payment. The second way is using receivables to secure a revolving line of credit through an asset based loan.
What is invoice discounting and invoice factoring
Both forms are the most common when it comes to invoice financing. They are financial services that allow businesses to release funds tied up in unpaid receivables can be cheaper than bank loans or overdrafts. Although both solutions provide similar results, both methods of financing are very different. Choosing between each method depends on the nature and size of your business, and your particular needs.
Factoring
Typically factoring works better for smaller businesses wanting to bridge the cash flow dips without the wait and hassle of collecting outstanding invoice payments.
A factoring facility finances and tracks individual invoices even if the whole ledger is financed. Often, the financier helps client with credit and collection activities as well. This assistance makes factoring a better choice for smaller companies, allowing you greater flexibility to concentrate on your core business at the strategic level.
Invoice discounting
Invoice discounting provides the same benefit as mentioned in factoring, the difference here is that the invoice seller (borrower) chases the debt themselves.
Invoice discounting is more suited for larger businesses where greater resources, whether human or information, exist, or if you want your company to deal with debt collection. Companies that are more established and have a larger turnover usually seek invoice discounting for its funding-only solutions.
Get pro-level advice from financing experts
Only the right piece of advice pertaining to invoice financing can get your business out of trouble and help to alleviate your cash flow dilemmas. In order to push forward and achieve business longevity and positive financial health, you need to acquire the best invoice financing package.
If it is getting hard for you to understand your cash flow situation, sign up to Populous World https://populous.world/invoice-finance/for-businesses.html — professional financing specialists who have expertise in invoice financing in order to plan your stress-free and debt-free journey towards business prosperity.
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Lou Chan, Populous World
