Managing cash flow and growth with invoice finance
Building a Better Business
Cash flow is the lifeblood of any business. It is the fuel that keeps operations running smoothly, enables growth, and ensures the timely payment of suppliers and employees. However, maintaining a healthy cash flow can be a challenge for many businesses, especially those that operate on credit terms. This is where invoice finance plays a crucial role. In this chapter, we will explore how invoice finance contributes to business growth and cash flow management.
Understanding Invoice Finance
Invoice finance, also known as accounts receivable financing or sometimes debtor finance, enables businesses to convert their outstanding invoices into immediate cash. It offers a way to access funds tied up in accounts receivable before actual customer payments are received. Invoice finance is typically provided by specialised financial institutions known as factors or invoice finance providers.
The Process of Invoice Finance
Invoice finance involves three key parties: the business seeking financing, the customers who owe payments (debtors), and the invoice finance provider. Here’s how it generally works:
The business generates an invoice for goods or services already sold and delivered to a customer and submits it to the finance provider.
Verification and Advance
The finance provider verifies the invoice and advances a certain percentage of its value, typically ranging from 70% to 90%.
Collecting the payments
The finance provider can assist on request in collecting the payment from the customer, however at all times mindful not to disturb the relationship between client and customer. The customer makes the payment directly to the finance provider.
Once the customer pays the invoice in full, the finance provider releases the remaining balance to the business after deducting fees and charges.
The Role of Invoice Finance in Business Growth
- Improved Cash Flow: Invoice finance provides immediate access to cash, eliminating the need to wait for customers to pay their invoices. This improves cash flow and enables businesses to meet their financial obligations, such as paying suppliers and employees on time.
- Working Capital: By unlocking the value of accounts receivable, businesses can free up working capital to invest in growth initiatives. This capital can be used to expand operations, invest in new equipment, hire additional staff, or launch marketing campaigns.
- Opportunity to Offer Credit Terms: Offering credit terms to customers can be a competitive advantage, as it encourages sales and customer loyalty. However, it can strain cash flow. Invoice finance allows businesses to offer credit terms while still maintaining a healthy cash flow by bridging the payment gap.
- Flexibility: Invoice finance is a flexible financing option that grows with the business. As sales and accounts receivable increase, the available funding also increases. This flexibility makes it an attractive option for businesses experiencing rapid growth.
The Role of Invoice Finance in Cash Flow Management
- Predictable Cash Flow: Invoice finance provides a predictable cash flow stream as businesses receive an advance on their invoices. This predictability allows for better financial planning, budgeting, and decision-making.
- Reduction of Bad Debt Risk: Invoice finance providers often conduct credit checks on customers before approving financing. This reduces the risk of bad debt by identifying customers with poor creditworthiness. In addition, the responsibility for collecting payments rests with the finance provider, further mitigating the risk of non-payment.
- Outsourced Credit Control: Invoice finance providers can often assist in credit control, including credit assessment, invoicing, and collections. By outsourcing these tasks, businesses can focus on their core operations and save time and resources associated with managing credit control in-house.
- Faster Growth Cycles: With improved cash flow and reduced payment cycles, businesses can shorten their growth cycles, seizing opportunities to expand into new markets, launch products, or acquire competitors.
Invoice finance plays a vital role in establishing and growing many Australian businesses, small medium and large.
Business owners and entrepreneurs should consider invoice Factoring as a cashflow and working capital finance tool in their businesses.
Types of Invoice Finance