Invoice financing – finding the right solution to your cash flow needs
Cash flow is the lifeblood of any business. Your profits may be strong and your outlook good, but if you experience cash gaps between delivery and payment, it can inhibit your business’s ability to invest, exploit larger opportunities, or simply manage day-to-day costs. In many cases, a business’s debtor book is often one of their largest tangible assets, hence why using your debtor book to manage cash flows (be it short term or through a growth phase) is smart, properly structured business finance.
Invoice finance (also known as debtor finance, invoice discounting, factoring, cash flow finance or receivables finance) is a form of finance where a business client sells one or more current invoices to a financier, without the requirement for other forms of security. The financier will purchase the invoice for most of its value, then when the invoice is paid the financier forwards the balance of the invoice value, minus fees, to the client.
Some examples of where invoice financing can be a great solution are:
1. If a business is new or growing – without a credit history it can be a challenge to secure bank finance. Invoice finance lending is based on the health of a business and the value of outstanding invoices
2. The bank says “not without real estate security” – often business owners do not want to use or do not have any personal real estate to use as security against a business loan. If equity in real estate is available, the astute investor will quickly determine that investing in positive cash flow property (and utilising leverage) will result in their ability to eventually access much more funds than they would if the equity was used as security for a facility such as an overdraft.
It’s a case of utilising the correct “tool” for the job.
3. If customers take a long time to pay, or are late to pay – this can quickly absorb a business’s cash reserves, making it hard to even manage the day-to-day expenses. Invoice financing quickly can release funds tied up in unpaid invoices.
There are many providers of invoice financing solutions. Unlike the banking industry, invoice financing is an unregulated industry with many varied lenders and terms and conditions. As such, it is vital that you understand:
1. What does your business need?
What level of funding is required and for how long?
Do you need the flexibility of no lock-in contracts, no debtor concentration limits, and funding based on invoice values rather than pre-set limits? Will the facility grow with your business?
2. What are you being offered?
Be sure to read and understand any contract presented to you. Some facilities have hidden fees (facility fees, audit fees, and disapprovals to name a few) which are often not understood by the client. For facilities with lock-in contracts, early termination fees are common – I have come across termination fees of six figures upon facility “approval”, without any finance provided!
Only apply for a facility once you understand what it is your business needs and what you are being offered. It is very much a case of finding and utilising the right tool for the job. When the right facility is chosen and utilised correctly, invoice financing can not only help your business survive cash gaps, it can boost your business’s growth.