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.
When invoice financing is the topic at hand it is expected that factoring and discounting will likely be items up for discussion too. Speaking of factoring, do you actually know what it is? If not allow us to give you a brief explanation. It is a receivables financing option that allows companies to sell their customer invoices to a factor for a discount or fee in exchange for an advance of the value on the said invoices. Here, the receivables portion of the balance sheet is converted to cash even before the plotted sate for which they are to be collected form owing customers. In essence it is a sale of a company’s assets. Today, many businesses make use of such method to improve cash flows, increase capital and decrease doubtful expense to name a few. If you are one of them then it would be best to know the qualities of reputable factoring companies.
PUNCTUALITY is a must. One of the reasons why companies decide to factor their receivables is to hasten the recognition of cash. If the firm is unable to do so in a timely manner then the very purpose of your actions will be foregone. We all know that time is an important factor in business and those who cannot deliver on time are dead weight.
CUSTOMIZED SERVICES is another. Not all companies belong in the same industry. Not everyone has the same transactions. They don’t sell the exact same products and offer completely parallel services. Businesses differ in one way or another making it a must that your factors should be able to provide you with a service that is personalized and custom built for you. Sure, the policies and other standard procedures will hold steadfast but there will be items that should depend on the company being serviced.
COMPETENT STAFF are necessary. As they say, a company is only as good as the brains behind it. No one can continue walking the path to success with an incompetent team. Make sure that the people and the professionals are indeed skilled and qualified as they say they are. Check for qualifications, licenses and even ask for previous experiences and services.
REASONABLE PRICING is also something to consider when looking for factoring companies. You surely do not want anyone to charge you with a price so high that it becomes so much of a burden. Make sure that they are too are not cheap now but expensive later. Always consider things at the long run.
Every businessman and businesswoman knows that in order to put up a company, capital should be present. Without it one simply cannot function. Capital is used to acquire all other assets necessary for operations. This is why entrepreneurs take time to carefully study their options when it comes to raising financial resources. For many, this is achieved with the help of UK Single Invoice Finance Companies. But when exactly do you need their services? How do you know when to give them a ring?
- Restrictive and expensive bank loans are one. Not all companies can afford one and not to mention that it is pretty hard to apply for a loan and actually get approved. Many small to medium scale enterprise are skeptical regarding acquiring debt early on so invoice financing becomes a really good option instead.
- In a similar note most loans require some sort of collateral that will include business and even personal assets. Most owners do not like to risk their personal assets. Invoice finance does not need any collateral as it is not a loan in the first place.
- Untimely customer payments are another. Unless you sell your goods and services solely on cash then this shouldn’t be a problem. The thing, however, is that most businesses do so both in cash and in credit. There will always be a risk of non-collection and that is the very reason why there is something we call “doubtful accounts expense”. To help prevent this or lessen their unhealthy impact towards the company, you can sell the said receivables and advance their value instead where any risk of nonpayment is transferred to the finance company.
- A rising opportunity loss is another thing. With a lack of financial resources many businesses forego certain opportunities, projects and ventures which could have given them a breakthrough, a massive increase in sales and promising growth. To acquire more funds, invoice financing either through factoring or discounting allows them to generate funds from receivables that are yet to be paid by customers in the following months to come.
- By now many entrepreneurs already know the importance of cash flows. Just because your assets are growing doesn’t mean more cash for the company. Who knows much of them are locked up in customer invoices? This creates a negative impact on cash flows as more disbursements are made than actual inflow of cash. With UK invoice finance companies advancing the value of the said invoices, cash flows are bound to improve.
When it comes to raising funds and capital for businesses, a lot of options can come to mind. One of the popular options that many entrepreneurs consider is a receivables financing kind called discounting. Such is a method by which companies like Working Capital Partners get to receive in advance the value of their uncollected receivables before payment is actually made by the owing customer. In here, the transaction is closely akin to that of a loan in the sense that the customer invoices are used as collateral. This reason in particular is the cause why a lot of invoice discounting companies have come aboard the said industry.
Let’s explain the process a little further. Now although discounting is said to be akin to a loan it still does not provide the exact same effects. One notable difference is the absence of any interest. What happens when you subject your receivables as collateral is that you get to receive their value at an early point. The amount you get to receive is relatively proportionate or discounted towards the invoice amount. You then go on your usual business and collect from your owing customers. Once you have already collected from the said customers you will then have to repay the advance that the service provider plus any agreed upon fixed fee.
What are its perks?
- It provides a quick injection of cash. No more waiting as you do with bank loans. You can get the needed funds real quick!
- It also improves cash flows as it converts and frees up any locked up cash from your customer invoices.
- It does not affect the liabilities portion of the balance sheet making way for more attractive financial statements.
- It does not involve any compounded interests. The fees or discounts to be paid are fixed and agreed upon beforehand.
- With the above said, it is less costly when compared to other financing means such as loans.
Are there any downsides to it?
Well for one it can reduce the value of your receivables as opposed to when you choose to wait for your customers to pay. However, such decrease is relatively low and most companies will in fact forego such disadvantage since they find more benefits to it. After all, in business everything comes with a price. You just have to make sure that the benefits will always outweigh the costs.
So if you feel that this financing method is for you then better search for available invoice discounting companies. Inquire and study your options well.