Cash flow concerns can hurt businesses of all kinds and across all industry sectors. Solutions aren’t always easy to find and traditional routes to finance aren’t always accessible. However, there are alternatives and methods of raising funds through company assets that often go overlooked but which can offer a vital lifeline to struggling businesses.
In an ideal world, client companies would settle invoices as soon as they receive them and service providers would not need to wait patiently for payments coming down the road. In reality, businesses often leave suppliers in the dark about when they’ll be paid and cash flow concerns can very easily emerge as a result. For the most part, issues with delayed or less-than-prompt payments can be managed by a business operating as normal but when cash is in particularly short supply then real problems can arise and business bosses are required to take action.
One potential solution to these basic cash flow concerns is invoice financing, which essentially allows a company to raise funds through its sales ledger. The option will not be right for every organisation but when a short-term finance solution might serve to offset potential longer term trouble then it is well worthy of consideration. Smaller businesses often find invoice financing particularly helpful because they can be relieved of the responsibility to pursue their clients for payment.
Ultimately, the reason why invoice financing helps hundreds of companies in the UK and elsewhere is that it frees up funds on the basis of work already done or services already rendered. Terms of invoice finance deals vary but with the right levels of communication between relevant parties there is no reason why such an arrangement can’t be beneficial in the short, medium and longer term.
Invoice financing works best when client companies have a strong credit rating that supports the value of an invoice issued to them. Businesses with a large number of small clients are unlikely to view invoice financing as an appealing option but, by contrast, those with a small number of large clients can stand to gain considerably from the process. Similarly, companies who do the bulk of their business at a certain time of year can give themselves valuable flexibility by freeing up funds through invoice financing.
It is important for companies considering using their invoices to free up funds to be fully aware of the type of arrangement they are entering into. Not all invoice financing deals are designed to function in the same fashion. Factoring, for example, effectively opens up a line of credit for a company and allows them to draw up to between 70 and 85 percent of the value of their sales ledger. Factoring also passes the responsibility for securing payment of invoices onto the lender involved but it does generally mean that a company’s clients are made aware of their supplier having used their invoices to raise funds.
Meanwhile, the process of invoice discounting enables a company to open up a line of credit on the basis of unpaid or overdue invoices without debt collection responsibilities being passed on to a third party. Broadly speaking, factoring is taken to be a solution most suited to the needs of larger businesses who are able to deal with the process of chasing after unpaid amounts and staying on top of associated costs and management issues. Smaller firms tend to be more inclined to use factoring as an invoice finance option because, once they’ve paid all relevant fees, they can focus on using the funds generated wisely and in ways that make sense for the future.
Another alternative means of easing cash flow concerns or raising funds when they are needed is asset financing. Here again, there are reasons why the option might not be ideal for some businesses under particular circumstances but when cash is required quickly then leveraging assets to get a loan can be a prudent and practical solution. The type of assets that can be used as collateral to secure loans and release cash into your business will depend on the nature of your work but could include any kind of heavy machinery, a fleet of company vehicles or non-essential equipment.
The key point to have in mind for any company director considering alternative funding options is to focus on finding the solution that works best for your business. The details of any lending arrangement are crucial and that is certainly the case when it comes to invoice financing, factoring, discounting or using assets to raise funds. The good news is that there are more methods of raising funds available to businesses than many company bosses realise. However, it is vital for anyone entering into these arrangements to get the right advice on key issues and about which strategies offer the best potential route away forward.
Mark Halstead has worked at companies across the financial services industry and is a fellow of the UK’s Institute of Marketing. He is a partner at Red Flag Alert, an online business information bureau and part of the Begbies Traynor Group.