Cashflow is a particularly important part of business. When cashflow is positive, a business will have more money coming in than it has going out. This means that the business is able to pay its debts and staff wages. Nevertheless, it is often the case that sometimes a business will have a negative cashflow, meaning that the amount they are paying out is higher than that coming in. But why would this be the case?
The reality is that to do business a company will need to pay for things such as its stock or expenses that enable it to provide a service. This is all before it can start getting money from its customers for providing their particular product or service. The following as a good example of what we mean.
A company that manufactures and sells electronics will need to buy its parts from a supplier as well as hire staff to make said product. The supplier might have agreed credit terms with the company that requires payment of the invoice after 30 days.
Let’s imagine that the company’s customer places an order for a set number of products. The company will order the necessary parts from the supplier. Once the parts arrive, an invoice will be sent to the company with a due date 30 days thereafter. The company’s employees get to work making the products and, after two weeks, the products are shipped to the customer. Now imagine that the company has agreed to give its customer credit terms of 60 days. This means that the customer will not be due to pay the bill for 44 days after the supplier invoice is due for payment.
In the meantime, the company will also need to pay its staff and other expenses such as electricity and taxes. As you can see, this can cause cashflow problems and more money going out than coming in.
How Can Invoice Financing Help?
If you are struggling to keep your cashflow positive, an obvious solution is to apply for a business loan from your bank. This though is not always as easy as it sounds. For example, a business that is quite new is unlikely to have a healthy credit history, so a bank might not be willing to lend to it. Or a business could have a less than favorable credit score due to making late payments to suppliers because of cashflow issues.
According to Utah-based finance company Thales Financial, this is where invoice finance can help. With invoice finance, a company can access a percentage of a customer invoice shortly after it has been raised. Instead of having to wait for the full credit term, they would borrow against the invoice and get cash from a third-party company. Depending on the agreement with the finance company, the company can retain responsibility for collecting the customer debt and making the repayment or they could allow the finance company to collect the debt instead.
The great thing about invoice finance is that it allows companies that do not have assets to use as collateral for a bank loan to access funds quickly and easily, often in as little as 24-hours. This can be a massive boost to cashflow as it allows the business to settle their own outstanding invoices on time, or even earlier should they wish.
Having a positive cashflow is the goal of all businesses. Unfortunately, though, this is not always possible, particularly if supplier invoices are due before customers pay. With invoice financing, companies can access a percentage of their customer invoices shortly after these are raised, which will boost their cashflow.