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Even highly profitable businesses can find themselves in danger of needing the services of an Insolvency Practitioner if they don’t manage their cashflow properly.
If you bill your customer £5000 today on 30 day terms for a job which cost £2000 to complete, then that’s a tidy profit once you get paid.
But what do you do if your supplier’s credit terms are only 14 days and you only have £500 in your business account?
Invoice Financing is one possible business funding solution, which allows you to pay your supplier while you wait for your customer to pay you.
What is Invoice Financing?
Invoice Financing is a way for businesses to improve their cashflow by accessing funds which are tied up in the debtor’s ledger.
This is done by entering into an agreement with an invoice financing company to assign all the book debts of the company to them. Once the invoice is raised, the finance company will pay the business an agreed percentage of the debt straight away allowing the business instant access to money that would otherwise be tied up until their customer paid. In the majority of cases, the finance company will take responsibility for collecting the debts due.
Once the customer does pay, the finance company will pay the remainder of the invoice value to the business, after deducting their fees for providing the service.
What are the Pros & Cons of Invoice Financing?
When it works well, engaging a finance company to manage a business’s debtor’s ledger can be of huge benefit especially to those businesses without a cash buffer to cover the late payment of invoices.
Invoice Finance also frees up the business from having to monitor and follow up customer payments. For businesses who aren’t large enough to have their own accounts staff, this saves the business owner from having to dedicate time on administration which could otherwise be used doing the work that earns money.
There are disadvantages to invoice financing as well. Naturally, it isn’t a free service. The finance company needs to make money too, which means that the business issuing the invoice must sacrifice some revenue in return.
Invoice finance companies each have their own terms and conditions. They may insist on long contracts and minimum fees which can make it expensive to change to another provider or to come out of invoice financing altogether.
Business owners must be very clear on fees and other disbursements charged by the finance company they’re considering dealing with. If margins are too low, or fees too high, it may not be viable to sacrifice a percentage of invoice value.
Finally, for businesses reliant on good relationships with their customers, engaging a third party to manage credit control may damage those important relationships if the finance company is too aggressive in chasing payments.
Cashflow, Invoice Financing and Insolvency Finance
If your business is under financial pressure due to issues with cashflow and you’re considering invoice financing as a potential solution, then it pays to investigate all your options before making a decision.
At Lines Henry, we’re accustomed to helping businesses both large and small to make the right choices when it comes to matters of cashflow and insolvency. We offer a free consultation too, so there’s no reason to worry about whether you’ve made the right choice, contact us and get the support you need.
It’s possible that invoice financing might be right for your business. However, if it isn’t then we can suggest a more suitable solution, guide you through the process and provide the reassurance that you’re making the right choice which will give you the very best outcome.
Speak to us, we can help.