When you ask almost any entrepreneur why they began their business, the answer is not always to manage payments and a balance sheet. Whether you like it or not, a company’s success or failure is inextricably linked to its financial management.
Cash is the lifeblood of any organization; without it, the company cannot function, and when it runs out, it can be fatal, similar to a heart attack.
While many small businesses fail due to a lack of capital, many businesses also owe money to their customers. Every business must deal with the constant demands of payroll, suppliers, stock, HMRC, and unanticipated shocks throughout each economic cycle. Regrettably, for some, this is simply too much.
So, if a company owes money to others, how can it go bankrupt?
‘Invoice financing may be worth looking into if waiting for invoices to be paid puts a strain on your operating capital.’
Cash inflows and outflows
The most typical assets of a firm are cash, trade receivables (invoices issued but not yet paid), cumulative revenue, and inventory. The companies with the healthiest balance sheets have enough operating capital to bring on new clients, recruit new workers, and stock inventories to fulfill new orders and withstand a market downturn.
Growth could be just as hazardous as going silent for a few months. The amount of cash in the company may be the first to suffer, as more and more of it is spent on fulfilling increasingly larger orders, and the time between executing those orders and receiving payment for them can be as long as 90 days or more.
Working capital may be enhanced in two ways: by making continuous, incremental changes in the operation to make the cost base as efficient as possible and by injecting funds into the company more quickly and directly. Regardless of who you are or what you do, cash remains supreme.
>Also see: 15 methods to increase the financial flow
What are your possibilities for putting money into the business?
There are two ways to inject money, one of which is rather straightforward and the other less so.
The first option is to seek outside funding, which will almost certainly take the form of a loan. This is a great option if the cost of servicing the loan (which includes set-up costs and interest payments) is more than compensated by the revenue it generates. On the other hand, requesting a loan can be time-consuming, the terms can be onerous, and the cost rises as interest rates rise.
Exploring your balance sheet is another possibility for quickly acquiring dollars. Every successful business will have capital sitting idle on its balance sheet in the form of trade receivables or bills that have been issued but not yet paid.
What is invoice financing, exactly?
Invoice finance, like many great ideas, starts with a simple notion. Instead of waiting for your client to pay you after you finish the project, your invoice financing provider will pay you a percentage of the invoice amount when you increase it. This implies you’ll be paid for at least some of your job in as little as 24 hours, enhancing your cash flow and increasing your working capital.
How does invoice factoring operate, and what does it entail?
By selling their invoices to a third party, businesses may assist their cash flow using invoice factoring. Independent financial organizations or banks can do invoice factoring.
Traditional invoice factoring requires the customer to have the factoring company handle the sales ledger and credit management for a set period (also known as a whole-turnover agreement).
When an invoice is issued to the final clients, the factoring company will advance a share of the proceeds. The factoring company will manage credit control, saving time and improving working capital.
How does invoice discounting operate, and what does it entail?
Invoice discounting is similar to factoring in that the customer provides invoices for completed work to the financing source. On the other hand, most invoice discounting services are confidential in the sense that the end client is unaware that the company has chosen to finance a portion of the invoice. Even though this is seen as a benefit, the client is still in charge of collecting payment for the invoice. The invoice finance provider will charge extra fees if the debtor is late.
What’s new in the invoice finance world?
Invoice finance is less well-known than it should be. This is due partly to a lack of knowledge about what’s available, in part to market perception and recent government-backed loan-based attempts.
Established invoice financing companies have historically done themselves no favors by delivering solutions that are difficult to qualify for, entail a lot of paperwork, are costly to manage, and have a messy pricing structure.
Companies must sign contracts for at least one year when considering a total turnover agreement. They pay a monthly membership fee, the actual cost of paying the bills, and daily interest. Furthermore, the funding provider will take on an active debenture over the company, limiting the company’s ability to raise additional funds. Even though it is not a loan, it appears and feels like one. The good news is that the sector is evolving thanks to cloud-based technologies and open banking. New digital platform entrants provide set rates that incorporate credit insurance and management, simplifying administration and lowering pricing.
Hydra, for example, is a great example of this: we finance 100% of invoice values, minus a set and fair cost. Our service is digital, allowing us to make financial decisions in real-time. We charge a one-time fee that includes credit insurance and monitoring, and we don’t need our customers to sign long-term contracts.
Is invoice financing the most cost-effective solution for me?
As we enter a period of rising interest rates and increased uncertainty, the short answer is yes – there will surely be an appropriate solution for your company.
Businesses use invoice finance instead of extending current borrowings because it provides a cash advance on previously received funds.
If waiting for payment terms on issued invoices is straining your working capital, invoice financing may be worth considering – it’s better than falling into financial difficulties because clients owe you money for work you’ve done.
Hector Macandrew is a co-founder of Hydr, a digital invoice financing company.