Cash flow problems – what’s the solution?
Issues with cash flow are not a new problem in the world of business. When you offer your products or services on credit terms, it is not surprising that waiting for those invoices to be paid can cause problems with business going forward. Finding a solution to help with cash flow can be a daunting prospect – there are many available options out there and it can be difficult to work your way through the huge amount of information. This article aims to explore one solution that can help solve this problem – invoice discounting.
Invoice discounting – what is it?
There are currently over 44,000 companies in the UK which are utilising the benefits of invoice finance and over 23.7 billion invoices have been funded – with no signs of slowing down. But what exactly is invoice discounting? Invoice discounting – also known as confidential invoice discounting (CID) is one type of facility under the umbrella of invoice finance, which also includes factoring, CHOCCs and selective. Invoice financing is a form of borrowing against unpaid invoices. This means that instead of waiting the usual 30, 60 or 90+ days for invoices to be paid, you can receive those funds the day you issue the invoice – a huge advantage regarding cash flow. The process is as follows:
The process of invoice financing
- You provide your product or service and give your customer the opportunity to pay on credit terms.
- On the same day you issue your invoice to your customer, you also upload the invoice to your chosen lender’s platform.
- The lender will release up to 90% of the invoice value on the same day.
- Once your customer pays their invoice, you will receive the final 10%, minus a lender’s fee.
Invoice financing is the broad term, so what is the difference with invoice discounting? The features of invoice discounting all relate to keeping your facility confidential. It is often the case that companies do not want their customers to be aware they are receiving such financial support from a lender. With invoice discounting, the lender’s notice of assignment does not appear at the bottom of invoices and therefore not seen by your client. However, it is important to note that it is still possible to see on Companies House that a business has a charge on the debenture – this is the case for many types of business borrowing.
The other main feature of invoice discounting is that the credit control – chasing debtors for payment – is kept in-house. This is often preferable as some businesses do not want a lender to communicate with a client that they have built a relationship with. Conducting your own credit control is important to consider carefully as this increases the amount of administration to be completed by your company – lenders usually require management accounts to be sent on a monthly or quarterly basis to ensure transparency.
What are the other advantages?
One large advantage with having an invoice discounting facility is the potential for discount from suppliers – having fewer issues with cash flow may mean you can pay for supplies sooner. There is then the opportunity to negotiate a lower price as this is favourable to suppliers, for their own cash flow reasons. It is quite often the case that invoice discounting facilities can pay for themselves through these discounts.
Another advantage of invoice discounting in comparison to other forms of business borrowing is that it is largely safer – unlike traditional business loans, you are only able to borrow against invoices that are due to be paid by your clients. The risk of falling behind on payments is eliminated – you can only spend what you are going to receive.
How do I sign up for an invoice discounting facility?
At Contact Business Finance, we can help you find a lender and CID facility that suits you and your business’ needs. We understand that every company is different and will take the time to get to know what you are looking for. If you would like us to explore the market for you in a free-of-cost, confidential service, simply give us a call today on 01902 219260 or email info@contactbusinessfinance.co.uk.