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One of the biggest issues facing lots of small, medium and even bigger businesses at the moment is cash flow. Invoices are taking longer and longer to be settled and while overheads remain constant, those cheques just aren’t coming in as quickly or as regularly as they should be. This can put a huge strain on a business, especially when you have wages and rent to pay at the same time every month. Cash flow problems are a reason many start ups fail in the first year of trading, as they just don’t have enough cash to keep themselves afloat when clients are late paying invoices.
One of the quickest ways of overcoming this problem is to sell your invoices on to a third party – a practice known as invoice finance. As soon as your issue an invoice, you’ll receive an agreed percentage immediately from the funder. The rest, minus a small admin fee, will come once your clients pay in full.
Invoice finance can be split into factoring and invoice discounting for businesses. Here we’re going to focus on exactly what is meant by invoice discounting.
What is invoice discounting?
If you choose invoice discounting over factoring, this means that you will retain control over your sales ledger meaning that the job of ensuring your clients pay the invoices will rest with you. This enables you to keep your invoice finance agreement with the third party funder confidential from any dealings you have with your clients. It also helps you to work and build on your business relationships with your clients.
Factoring on the other hand puts the control of your sales ledger in the hands of the factoring company.
What are the advantages of invoice discounting?
The main advantages of invoice discounting and factoring rest with the constant stream of cash flow you’re able to receive, as and when you issue invoices. For many small and medium sized enterprises this is the boost they need to stabilise their operation before looking to grow and expand.
As the business starts to increase and more invoices are issued, the more funds will become available through invoice finance. This type of “asset based” finance means that the more your business increases, the bigger the scope of your cash flow, meaning you can rest easy that a steady flow of income is coming into your business.
Cash flow is huge for many businesses, especially smaller ones. Thankfully we have pretty good relationships with all of our clients so getting paid when we invoice is not much of an issue for us.
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Good point about how much more important it is for a smaller business. They might have a tougher time securing a loan or other funding if they happened to use up all of their cash flow.
It is all about cash flow. I have never heard of invoice financing, but it sounds like an interesting concept. I would argue that if you are sending it off to a third party, you won’t be making as much money because of fees. When you are a small business, every penny counts.
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It is a bit of a toss up. On the one hand you would be making a little less money. On the other hand, your cash flow would be much easier to manage and you’d save time chasing down bill payment.
I’ve never heard of invoice financing either. So many businesses are not the greatest with collecting, so this should be looked into!
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That’s true. Some are just a little too nice to be in business. So they let people take their sweet time paying their bills even if it puts them in a tough position. Or other times they are just in a niche where it is common practice to delay bill payment as long as possible.
Interesting post – learn something new every day!
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Yes I’m sure a lot of people didn’t know such a service existed unless they happened to run a small business who has used this service.
When I read the title, I was thinking of the other kind of invoice discounting, where you agree to drop the amount due if the invoice is paid by a certain date.
Or making the client feel like a valued customer by listing a discount off your quote. I’ve done that myself.
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I’ve done that myself with services I provide. It allows you to make customers feel like you’re doing special for them, while still being able to charge others full price if necessary. I also assume that what this post was going to be about when the guest writer sent it in.
It’s worth accepting a little less profit in exchange for good cash flow.
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Many businesses would see it this way. It could be the difference between staying in business and having to close shop due to not being able to pay your own bills.
I never heard of Invoice Financing. But I guess if you have trouble getting paid then this helps.
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I wonder if threats and breaking some legs is included lol. Even just to save the time in a business with limited man hours, this might make a lot of sense.
Invoice financing is new to me as well. This makes sense given the cash flow needs of small & mid-sized businesses–stability is key before you can set forth on a growth plan.
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Yes you don’t want to try to grow your business if your cash flow is in a state of uncertainty. Doing so may just risk all of your efforts.
That is an interesting concept and could certainly be useful during starting a business and during slower times.
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I wonder how flexible those companies are. It would be great if you could use them on shorter contracts when more bills need to be collected. I suspect they want people to commit to them longer though.
Wow, a really simple concept that could make or break small businesses. I’ve run a small business that failed and while I wouldn’t say it was 100% due to cash flow management, I would say it was about 50%. Monthly payments were very difficult to collect 14 years ago… I guess invoices should be considered no different from mortgages or municipal debt, both of which are sold off to collectors to make it easier on the underwriters.
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I too had a problem with cash flow with a business I was involved with. I made the mistake of putting charges on my credit, but there was always a gap between when I could pay it off again. So those interest charges really made me reconsider the approach I was taking.
If it’s a new business that needs the funds then this is ok, but if you are successful with managing the operations then this is not needed.
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I do agree that an established business shouldn’t be spending money on something like this. Instead they should be able to handle this kind of stuff in-house. They wouldn’t also be as vulnerable to cash flow issues.