Is Factoring Sales Invoices a Good Form of Business Finance?
Most Businesses, especially SME’s would Benefit from a Capital Injection or some Financial Help as they grow.
Could Factoring be the answer and what IS the difference between Factoring, Debtor Finance and Invoice Finance?
Factoring is growing in popularity as a simple and straight solution for the cash flow needs of many SME’s that sell their goods and services on credit terms, but many business owners in the SME space are unsure whether it is a good idea or not. The thought of Factoring your sales invoices often brings to mind the days when factoring was mostly used by businesses that were in trouble. This is no longer the case, as we are now seeing many large and very successful businesses realise the value and flexibility of this type of finance.
Invoice finance and Debtor finance are basically the same thing; they are advances against the value of your as yet unpaid sales invoices.
This finance usually comes in two forms: Factoring and the other is Invoice Finance and each have their pros and cons.
- Invoice finance is usually for large companies with very strong Balance Sheets and very good processes in place. It is usually confidential and the Client retains responsibility for collection.
- Factoring is usually fully disclosed. This means that the Seller and the Buyer are aware of the involvement of the Factoring business.
Debtor finance can be very good for a business.
Businesses that offer customers credit terms can run into trouble even though the business is performing well and making a profit. Delayed and slow payment of sales invoices is a common problem in the business-to-business sector, and when it happens regularly it can cause cash flow distress and even lead to the business failure because they can’t pay their bills even though they are making a profit.
Also, it’s is often the “blue chip” and “multi-national” customers that are the slowest payers so just when the business owner is celebrating landing a “big fish” as a new customer, the cash flow starts to slow down and the thriving expanding business struggles day to day to find the cash it needs. It has lots of sales, but the invoices are, as yet, unpaid.
Cash flow, or rather, lack of cash flow can bring even large companies to their knees.
The businesses that feel cash flow stress the most and where Debtor Finance can be their salvation, are those that have creditor and expense payment terms shorter than their sales payments terms.
For example, Labour Hire, Call Centres and Facilities Management business have to pay their salary and wages weekly or monthly but usually their sales invoices are paid monthly or 30 days from end of month and sometimes even 45 or 60 days.
Transport companies and other contractors have to wait 30 or 60 days for payment but have to pay for fuel on very strict payment terms.
These business either needs lots of capital to remain in business or they need some form of Cash Flow Finance.
Factoring and Invoice Finance therefore have several benefits.
- Firstly, you know when you will receive your funding every time you issue an invoice and how much of the payment you will receive at that time. This allows you to plan your cash flow and keep your staff and creditors happy because they are being paid on time.
- Another benefit is that the factoring company will assist managing your sales ledger, in confirming that it is accurate and helping to follow up customers for payment.
- This leaves Management and Staff free to do what they do best, run the business and grow the sales pipeline.
Invoice Discounting is the other form of Debtor Finance, generally used by larger companies that need capital funds for growth. Unlike Factoring, Invoice Discounting allows a business to keep control of its sales ledger.
Because larger companies usually have larger sales volumes, they can achieve a very large cash injection in a very short time.
This capital can be used to grow the business and sometimes can even be used for financing management buy-outs or buy-ins.
For Factoring or Invoice Discounting to work, you need to find a Debtor Finance Provider or Factoring Company that will work with you and understand the needs of your business.
You need to find a Factor who has same attitude towards managing the customer relationship that the business owner has and will conduct affairs on your behalf with the same professionalism and approach to the Customer. It also helps a great deal to work with a Factor that understands the industry you operate in.
This is why we recommend the people at Nova Cash Flow Finance. They are professional, they understand business and go out of their way to work with the clients to achieve a win/win result.