One of the keys to keeping an enterprise afloat is learning to successfully manage your cash flow. This has been a significant issue for many start-ups and SMEs since the financial crash of 2007, due to the resultant reluctance of banks and financial institutions to lend to small businesses.
Many struggling SMEs have turned to invoice financing as a solution. Invoice financing offers a way to unlock the cash in unpaid invoices, meaning that you’re essentially able to borrow money that you know you’ll be able to pay back. This guarantees much-needed, immediate cash flow for many businesses.
There are two main types of invoice financing: factoring and invoice discounting.
Factoring
Factoring is a relatively simple concept to understand. The way it works is that you sell your invoices to a finance provider which can be found through Touch Financial, and in return they advance you a percentage, usually around 85-90 per cent, of the total amount. The enterprise will also take over the management and collection of these unpaid debts on your behalf.
Many businesses find that this is an extremely useful and efficient way to unlock capital from their business and help to keep their cash flow moving. Those in charge are experts in their field, and this means that payments are often made much more quickly than they would be if you dealt with them yourself. Even where they’re not, you still have the cash when you need it. Additionally, non-recourse factoring lenders provide you with protection even when customers don’t pay at all.
Aside from the financial benefits, many businesses choose to use factoring enterprises simply because of their administrative skill and capacity. This can actually reduce your overheads quite significantly, as you don’t need to employ a person or team to take care of this side of things for you.
Invoice Discounting
Although many see the responsibilities that factoring enterprises take on as a boon, invoice discounting is a viable alternative for those who prefer to retain control of this aspect of their business. It works similarly to factoring, but is usually restricted to companies with well-established in-house credit collection processes.
Invoice Financing Eligibility
Invoice financing can seem like an attractive option for many businesses, but not all are eligible for it. These services are usually restricted to businesses whose customers are other businesses, which means that retailers are generally not considered.
Traditionally, providers have imposed a minimum turnover of £50,000 upwards. However, due to the increased popularity of invoice financing amongst start-ups and fledgling SMEs, some enterprises are relaxing their guidelines in respect to this.
As a rule, it tends to be a good idea to tidy things up a little before you consider applying to an invoice financier for their help. Providers are businesses themselves, and they’re unwilling to take on companies that seem to pose little chance of helping them to turn a profit. If you have an invoice book filled with payments that are more than 90 days overdue, it is unlikely that a provider is going to consider you, but it is always worth an enquiry. Equally, if you have certain customers who are always late, then it’s time to perform a cull: tidy things up in-house and then hand them over to someone who can carry on your good work.
If your business is eligible, why not give invoice financing a try today?
If my business is need of budget, I would definitely try invoice financing. Thanks for the tip Pauline!
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