New business owners soon come to understand that cash flow is everything, particularly during the first years, which are often financially tough for them.
Most small business owners set up operations with limited access to funds. They either put up their personal property as collateral, or they borrow from friends and family to get the business off the ground.
Meeting Your Ongoing Financial Commitments.
Once they are up and running, it becomes an ongoing challenge to the free cash flows you need to meet day-to-day and month-to-month financial commitments and they sometimes have to get the services of a debt collection agency. Without the cash in hand, you won’t be able to pay your suppliers or invest in the equipment you need to offer your services. You will also need to pay existing staff salaries and hire new staff when your business is making the transition from a small to medium-sized business.
Maintaining consistently positive cash flows will ultimately determine the success or failure of your business – and the extent to which your company can grow in the early years.
However, new business owners often don’t have cash ready at hand to cover the times when cash flows come under pressure. They also don’t have the easy access to bank finance because they haven’t built up a strong credit history yet.
Invoice Finance Alleviates Cash Flow Challenges.
Invoice financing can offer new businesses convenient, and often critical, access to a source of ongoing funding. The funding is raised on the value of your accounts receivable. In essence, it is a discounted prepayment of your outstanding invoices.
Most new companies cannot afford to wait the 30 days to 90 days that many customers, particularly large organisations, demand. A big customer who is a late payer can also put your cash flows under severe pressure. Instead, by contracting with an invoice finance company to finance your invoices, you can gain access to the funds owed to you by customers within a matter of days.
You will receive between 75% to 95% of the value of the invoice, depending on the agreement you have entered into with the invoice finance company. The outstanding amount, less the fee you have negotiated, will be paid when the invoice has been paid in full by the customer.
The main benefit of invoice finance to new businesses is that the access to the funding is not dependent on your credit standing but rather on your customer’s. In the early days, when your business hasn’t had the chance to build up a credit history, it is challenging to get approval from a bank for the money you need. Applying for bank finance is also more administratively intensive, and it will take longer for you to gain access to the funds. Invoice finance is a more flexible source of funding.
Invoice Discounting and Invoice Factoring
A new business owner has two options when considering invoice financing: invoice discounting and invoice factoring. The7 former is the financing of the invoice on a discounted basis, with the business owner still responsible for following up on the invoice and securing payment in full. Only once payment has been made by the customer will the outstanding portion of the invoice, less the invoice finance company’s fee due, be paid.
Invoice factoring is, in essence, a financing and outsourcing service that hands over the responsibility of securing payment of the invoice to the invoice finance company. The finance company can also take over your entire debtor’s book rather than individual invoices and ensure that customers pay on time by following up and securing payment.
The advantage of allowing the invoice finance to manage the debtor’s book is that you don’t have to worry about whether the customers pay on time and you can focus on the other important decisions you need to make to grow the business. Given that your customers will be interacting with the invoice finance company, you need to make sure that you are happy to be represented by them and that they will maintain your good reputation as a supplier.
For companies that would rather their customers did not know they had contracted with a third-party to handle their invoice process and payments can opt for a confidential service, in which the business owner remains responsible for the invoicing process. The invoice finance company merely extends the funds to cover the value of the receivables outstanding.