Cutting the payment cycle

We have discussed potential solutions for minimising late payments and bad debt in previous blogs. In this blog we will consider the pros and cons of invoice finance, which is a means of borrowing money based on what your customers owe your business.

If you have ever been in the fortunate position of having a business that is growing rapidly, you will understand the challenge of getting money in quickly enough to pay for additional expenses such as extra staff, equipment and materials.

Rapid growth is great, but when your outstandings begin to pile up at the same time as your costs are rising you may feel the need to tap into some of that revenue more quickly than the agreed payment terms allow.

Invoice finance – the pros

Invoice finance is particularly useful for businesses that don’t have large cash reserves or companies that have seen rapid growth and need to accelerate their cash flow. They allow a business to release up to 90% of the value of an invoice within 24 hours, with the remaining amount released upon full payment of the invoice by a customer minus fees.

Invoice finance firms can check a customer’s credit worthiness, monitoring for any adverse signs and pre-empting problems with payment. In addition, the personalised advice they provide can be beneficial to a small business struggling with other financial problems.

Invoice financing allows a business to fund its own growth plans without having to levy physical assets against loans or other sources of finance.

Invoice finance – the cons

The ability of a business to secure invoice finance is dependent on its clients and the nature of their trade so it is not universally available. Cheaper options such as invoice discounting can be useful to plug short term cash flow problems, but other types (such as factoring) may be expensive and therefore harder to justify.

There will be a cost in the form of interest, fees or a discount to the face value of the invoice – all of which reduce the profitability of the business and means that in some cases offering an early payment discount can be cheaper than some forms of invoice finance.

Invoice finance can be difficult to escape once a business has become reliant on releasing cash from invoices on the day they are invoiced.

Can you afford to be patient?

Invoice finance can undoubtedly improve cash flow since you will be advanced the money you are owed before the invoice is paid. It may help with short term cash flow, but in the longer term reducing late payment requires a culture change that is only likely to be brought about by businesses changing their approach to credit management.

Taking effective action earlier will help your customers focus on paying on time, which in turn improves cash flow and reduces bad debt.

Either way, invoice finance should not be seen as a substitute for good credit management, which can be maintained by leveraging the financial information available from a cloud-based accounting solution such as Big Red Cloud.