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How invoice finance can help companies stay afloat

Some of the biggest problems modern companies face relate to cash flow. In fact according to the Federation of Small Businesses (FSB), 70% of small businesses have, in the last 12 months, experienced late payments; two thirds of SMEs have had to write off invoices, with 20% claiming to have lost £5,000 or more in unpaid invoices. Naturally late and unpaid invoices can cripple a business that is reliant on a stable and smooth flow of cash. By helping smooth out irregularities related to cash flow invoice finance can be a vital sail in helping a company stay financially afloat.

What is invoice finance?

Invoice finance is an asset-based form of lending, which enables companies to receive upfront cash that is tied up in unpaid invoices. An invoice finance company agrees to pay a firm’s unpaid invoices for an arranged fee. The business will typically receive the funds within 24 hours, which can be as much as 80 – 90% of the total value of an invoice. In some cases, namely the recruitment industry, 100% cash advances are provided.

There are two different types of invoice finance - ‘factoring’ and ‘invoice discounting’. While both types of finance involve the invoice financier buying a company’s debt that is owed to them by their customers, there are some differences between factoring and invoice discounting.

With factoring the invoice financer manages a company’s sales ledger and collects all the debts on behalf of the business. This means that clients are aware that a company has outsourced its sales ledger as the customers pay the third party supplier direct.

With invoice discounting, the company retains responsibility for all the credit checks, sales ledger and credit control functions. Consequently, customers are not necessarily aware that a company is using the services of a third party supplier. All payments through invoice finance are paid directly into a bank account that is administered by the third party supplier.

How can both factoring and invoice discounting help a business?

By injecting a lump sum of capital into a business’s finances the company can immediately turn this cash injection into a productive working asset. Many businesses, particularly SMEs, can find themselves stretched and due to problems related to cash flow, are unable to take on more hands. By providing a company with some working capital a business may be a position to hire new employees who will help move the firm forward. By assisting in its expansion of staff invoice finance can ultimately lead to a business growing in terms of size and productivity and ultimately increasing turnover.

Of course this cash injection need not be confined to taking on more staff. It could be used to pay for other essential assets that the company could not previously afford, such as company vehicles. Providing employees with new vehicles would eradicate the headache of unreliable cars, which will effectively boost and build up business capacity.

The same could be said about improving the IT infrastructure of a business. For example, just how productive is a member of staff if he or she has to wait almost an hour every day for a computer to boot up? Kitting a business out with the latest IT and software with the cash provided by an invoice financer could prove an invaluable investment and even result in preventing a business from the beckoning finger of liquidation.

With cash flow problems finding the money for marketing purposes is simply a luxury many businesses can’t afford. A lack of marketing can not only thwart company growth but it can also lead to its demise. With some fresh capital behind it invoice finance can enable a business to take on new projects such as a renewed marketing push which could play a leading role in helping a firm stay afloat.

Pay staff

Many companies rely on being paid invoices in order to then pay wages. This is particularly pertinent in the recruitment industry, which is notorious for being plagued by cash flow problems. Of course if employees don’t get paid they are naturally disgruntled and a disgruntled workforce is not conducive to company expansion and growth. This is where invoice finance can prove invaluable as it can ensure that a workforce is paid on time.

Less worry and more optimism

If a business is free of worries about tight cash flow it will have more room to manoeuvre and start thinking more optimistically and planning for the future. In short, invoice finance can make a company, of any size, more productive.

Andrew Rosler is an insolvency and debt advice expert with more than 20 years’ experience providing insolvency and recovery advice to business owners, professionals and consumers. Andrew currently runs Ideal Invoice Finance, a multi-disciplined insolvency and debt advice company, which specialises in providing business owners with viable business solutions and insolvency advice.

This was posted in Bdaily's Members' News section by Ideal Solutions .