When it comes to financing, credit and debt are two of the first things that come into mind. However we all would agree that entrepreneurs would want to avoid those two as much as possible. There’s nothing wrong with loans. Don’t get us wrong. But it would be far better to live off and operate without it, don’t you agree? So how do you raise funds without them? Is there any other way? Yes there are, quite a few in fact.
Explained in capsule, invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid. It is a short term borrowing but without the repercussions and effects that traditional forms of credit possess.
It works slightly akin to invoice factoring but instead, uses the receivables as a form of collateral. Also, the company still retains the burden of collection and will repay the financial provider with the sum advanced plus a percentage of fees.
How It Works
Businesses sell either on cash or on credit. The barter of trade with the former is immediate. Sellers provide the goods and/or services while buyers pay cash in exchange. As for the latter, the buyer defers payment as they become debtors thus owing amounts to the company.
Of course, most entities have set up means to ensure that they only extend such credit sales to deserving and qualified customers. However, it cannot be discounted that the cash that comes with the receivables and invoices created by such transactions is trapped and made unavailable for use.
To free up those invoices even before customers get to paying, invoice discounting can be used. The financial entity provides an amount equivalent to or of a certain percentage against the value of the invoices. Companies can use such resources in whatever means they find necessary. They will then collect from the owing customers once maturity date comes and once completed, they shall then repay the provider.
Perks and Benefits
Companies make use of invoice discounting for the perks that it provides. First of all, it helps strengthen the working capital and improve cash flows. Not only does it free up the locked in cash but it also creates immediate availability making it a great option in cases where the business is in need of instant resources for an emergency situation.
When it comes to corporate financial troubles and dilemmas, one of the most common ones would have something to do with the company’s cash flows. As a common problem among various businesses across all industries, it has plagued many businesspeople and entrepreneurs enough for the experts over at the Working Capital Partners to have tons of clients ask them for advice and possible solutions regarding the matter. But for the public in general as well as budding and new entrepreneurs, poor cash flows may sound confusing if not foreign. Worry not as we’re here to help understand what it means and what effects it can bring any company.
But first things first, what does a poor cash flow mean? It is a financial term that basically refers to the total amount of money being transferred into and out of an entity’s funds thereby affecting its liquidity both in the short and long term. Cash inflows may include a return on investment, profits from sale of goods or other income. Cash outflows on the other hand are the entity’s expenditures.
When you say that a company has a poor cash flow, it simply means that there are more funds going out than in or rather more resources are being spent than is being earned. In short, there are more expenses than there are profits. The effects of that can range from being simple and fixable to fatal and deadly which includes the following.
- A shortage of funds occurs thereby preventing timely payment and fulfillment of obligations to creditors and vendors. This can further lead to tarnished relationship between them and the company.
- In connection to the above, added interest expenses and penalties as well as a tarnished credit history can be brought about by poor cash flows too.
- Operations can be put on hold while other projects may have to be completely foregone due to lack of funds or resources to put them into play.
- The most fatal effect would have to be insolvency where the company can no longer fulfill its obligations as they mature and come due thus liquidation and other forms of business recovery options will have to be considered.
Hopefully, the team at Working Capital Partners has cleared the matter for you. Now allow us to ask a question. How is your company’s cash flow doing?
Factoring companies are one of the financial institutions that entrepreneurs head to when they need extra cash and capital for their businesses. The said entities provide services which we refer to as invoice or receivables factoring. This method allows entrepreneurs to sell the right to collect against their invoices in exchange for an immediate advance of their value. It is an effective means that isn’t time consuming or so much of a fuss to apply for. At the same time, it works for entities with increasing bad debts, poor cash flows, high levels of liabilities and financial problems.
Now, if you are planning to subject your customer invoices to the said service then below are a few things to ask your chosen factors before turning over your right against the collection. Read up and get to answering.
Question #1: How much can I expect to advance?
Each factor often varies in this department but you can expect around eighty to ninety five percent of the value of the invoices. It is of course best to ask and talk to many providers so you can weigh your options well.
Question # 2: Do you do single invoice factoring, monthly or both?
There are those who cater to factoring single invoices only while there too are those who only do a monthly or long term arrangement. At the same time you can find those that cater to both. You have to know your needs and at the same task ask the companies you talk to.
Question # 3: What are the fees involved?
This one will also vary from one factoring company to another. The service fee is an amount paid to the provider for the services rendered to them and is deducted from the amount that can be advanced. Be sure to ask what fees these are and what comprises it. You don’t want to be surprised so you better know for sure.
Question # 4: How fast can I get the funds I need?
The very charm of dealing with factoring companies is the fact that invoice financing can get your needed funds quicker than other funding options there are. Of course this does not go to say that every provider does this well. You have to scrutinize and ask them point blank about this. Get to know their process and at the same time you might want to read reviews and feedback on them too.
One of the main concerns that many businesses have is regarding their cash flows. It is important to take note that a good level of sales does not necessarily mean that the amount of cash that goes into the company is doing equally well. Remember that sales can either be in cash or in credit and it is pretty seldom for an entity not to have any customer receivables. This means that your cash inflows may not be looking good even if your sales are doing fine. This is what we call having your cash locked up in invoices making them unavailable for use. So what option do you have? You can improve cash flows with the help of UK single invoice finance.
What is it?
To hasten the turnover of receivable to cash, companies may want to advance the value of a particular invoice. To do this they choose from either two single invoice finance options: factoring or discounting:
In this arrangement, the company will sell the right to collect against a single customer invoice to a finance company referred to as a factor in exchange for an advance of its value. Such advance amounts to eighty five to ninety five percent of the invoice’s actual value. The factor then takes over the task of collection while the company proceeds to use the cash for whichever way it deems fit for corporate operations. Once the factor has been able to collect from the owing customer in full they will then forward any remaining balance on the invoice less any discounts and pre-agreed fees. So basically, the company sells an asset, its customer invoice.
This one on the other hand is a little similar to a loan although there are no debts and no interests involved. What happens here is an advance is still taken out about eighty five to ninety five percent of the invoice value. The invoice is then used somewhat as collateral. The company is still tasked to collect from its owing customer. Once that has been completed, it then goes on to pay the finance company plus any fees that have been arranged mutually.
You can improve your cash flows with the help of UK single invoice finance because they basically hasten up the availability of cash from the receivables. In short receivable turnover is improved and cash is made available even in as fast as twenty four hours to provide for emergency cases.
Have you ever heard of single invoice finance? If yes then you are already treading the right path but if no then you better make sure to read on. This funding method has proven to be quite the solution for many businesses today, both starting and established entities.
Single invoice finance is basically deriving funds from your customers’ invoices. Such invoices are essentially receivables of the company from its clients. Remember that sales are not always paid in cash some are through credit.
In the normal pace of things, a company would have to wait for weeks to months before the whole amount due has been collected in full. But what if you would need to pool some cash for use? You cannot simply withdraw your money from your bank accounts. Plus, much of your available resources may have already been allotted and restricted to different corporate activities and expenditures. The solution is to hasten up the collection of your receivables by advancing them. Does it sound complicated to you? Don’t worry it’s no rocket science. Here’s a deeper explanation.
There are two types of single invoice finance. The first is called factoring and the second referred to as discounting.
In factoring, the company sells its customer invoices to a financing institution often referred to as the factor. It will then receive an advance equivalent to around 85% to 95% of the said invoices. The burden of collection will now be reverted to the factor who goes on to proceed with the collecting and when your owing customers have fully paid, the remaining balance of 15% to 5% will then be given to the company less any agreed upon discounts or fees.
This is essentially the sale of the corporate assets which are the receivables or customer invoices where cash has been locked up.
Discounting on the other hand produces the same benefits but has slight differences. An advance is still made from the financial institution but instead of selling them off, they are instead used akin to collateral but with no interests attached. After the advance of the value of the invoices has been received, the company is still tasked to perform the collection from its customers. When the company has completed this, it will then use such collections to repay the amount advanced from the financing firm plus any fees agreed upon.
Single invoice finance, both factoring and discounting works as a finance option because not only does it hasten receivables, free up cash locked up in invoices and improves cash flows, but it also is not a debt and therefore does not add up to your liabilities.
It is a given fact that banks are strict and are even tightening their terms when it comes to loan approvals. This is bad news for most businesses because we all know that cash isn’t always readily available. Fortunately, receivables financing has become an option for businessmen ad businesswomen. In here, factoring invoices is possible meaning that you can derive funds and money from them even before your customers actually pay. To help us understand better and to know the benefits you get when factoring invoices, the experts at the Working Capital Partners have discussed the following:
First let us define invoice factoring a little more. When you use such finance method you will have to look for a financing institution referred to as a factor. They will provide you with majority of the percentage of your invoices’ value, usually 80-95%, proceed to collect from your customers and when that is completed send you the remaining balance less any fees. Rather than borrowing you are actually selling your assets, in this case your receivables.
So why are they becoming more and more popular and why are they being used by many? This is because of its following proven benefits:
- QUICK AND FAST – You can pretty much get hold of the fund in less than twenty four hours. If that isn’t quick enough for you then what is?
- NO LIABILITIES – It will not be reflected in your financial statements as a debt but rather a reduction in accounts receivable and an increase in cash.
- LESSER BAD DEBTS – It can also lessen the likelihood of bad debts and the expenses or losses attributed to such.
- NOT RESTRICTED – You can use the fund you get the way you want to. You will not be restricted unlike a bank loan.
- LESS HASSLE – It is not your credit history and capacity that factors is concerned about but rather your customers. This means that there is less hassle because you do not have to prepare your financial reports or prove your credit rating.
- NO MINIMUM NO MAXIMUM – You can choose to factor only one, two, more or all of your invoices. You can also do it whenever you have the need to.
- BYE CONTRACTS – You will not be locked and put in hostage under a contract that can run for a long period of time and cost you a lot.
- NEWCOMERS ARE WELCOME – Even if your business is small or newly opened you can make use of factoring.
- IMPROVED CASH FLOWS – It can provide a quick injection of cash into your cash flow thereby making it more attractive to investors.
- STRESS FREE – No debt, improved cash flow, lesser bad debts, not restricted, affordable and flexible, factoring invoices are just less of a hassle meaning no stress!
Receivables financing is considered a kind of asset financing medium which allows business owners to use its receivables in the form of customer invoices to raise its needed capital or resources to fund certain corporate activity or operation.
Here, the company sells its invoices to a third party financial institution called a factor at an amount that is slightly less than the actual value of the said receivables. This can be as high as eighty five to ninety five percent depending on the agreed terms. The amount can be procured in as fast as twenty four hours. The remaining balance will only be paid once the full amount of the invoices has been collected from the owing customers. This will then be lessened by some discounts which is considered the cost of the financing.
Receivable financing can also be referred to as invoice financing or factoring. Such arrangement can also be divided into two kinds: with recourse or non-recourse.
- In a “with recourse” arrangement in the vent that the owing customer does not pay their due, the company is required to buy back the invoices from the factor. Here the burden of risk lies on the company.
- Meanwhile in a “non-recourse” arrangement, the factor bears all risk as they will provide you the amount regardless of whether or not the customer pays their debt.
Now is this financing option good for your business? Here are some cases to consider in determining when you should enter into a receivables financing arrangement.
- You have to raise funds but would not want to go into a bank loan or a similar arrangement. A company that lives on debt and liabilities has a financial statement that is not pretty for investors and stakeholders. It can even signal a red flag. Receivables finance gets the benefits of a loan but they do not show up in your liabilities.
- You are a new company and applying for loans is both costly and tedious at the moment. Many new business owners find it hard to apply for loans because of the requirements needed. This method isn’t one that requires collateral which most banks need you to have.
- Your company has a problem on long outstanding receivables. If you have loads of customers who do not pay their dues on time or not at all then a non-recourse arrangement would be beneficial.
- You have to get hold of cash in as fast as possible. As stated earlier, receivables financing institutions can get you the fun in as fast as a day’s time.
If you own a business or are a high management employee concerned with the finances then this question may have already come to mind: How does one improve cash flows and increase capital without the option of debt and credit? The answer is through UK single invoice finance companies. What are they exactly and what are their services all about?
Now technically there is completely nothing wrong with credits but small and medium scale enterprises should remember to make use of careful balance and where possible avoid it. Even bigger and well established businesses should remember this too. A company with more liabilities than assets and who is funded by debt is not an attractive one in the eyes of investors.
This is where single invoice financing comes in. This financial option allows companies to acquire funds from a single customer invoice. What happens is the business advances the value of such receivable contained in the customer invoice even before the customer makes the payment. It is a one-time only process and is paid through the said discount. Let’s say that the invoice costs £100,000. The amount that you will receive is £97,500 where the difference of £2,500 is the service fee. Such amount does not compound in value like an interest. It is fixed and paid once. In fact in the event that the owing customer does not pay come the due date, the finance company bears the risk as in a non-recourse setting.
How exactly does single invoice financing improve cash flows? Below is a list to help you understand better:
- It allows for quick injection of funds into your cash stream and even in as fast as twenty four hours or less making it a good option for emergency needs and expenditures.
- It converts the receivables into money itself thereby increasing cash inflows. Sometimes even if the company is earning and has high sales such are not indicators of money inflows as part of sales are on credit. By factoring or discounting your invoice the conversion rate from receivable to cash is therefore improved.
- It only affects the asset portion of your balance sheet or statement of financial position. The accounts receivable account goes down as the cash and cash equivalents account goes up. It does not in any way affect your liabilities making it financial statement friendly.