If you’re a business that sells to other businesses, you’ll no doubt receive a purchase order from your customer, agree a quote for your goods or services, then send an invoice once the work is completed. However efficient your processes, if you have to wait 30, 60, 90 days or longer to receive payment, you’re likely to be restricting your cashflow and limiting your growth potential. With over half (57 per cent) of Irish SMEs citing timely collection of customer payments as a real issue, invoice finance aims to solve this problem.
While you can never guarantee that every single customer will pay a bill on time, you can get paid earlier and improve your cashflow. That’s the basic concept of invoice finance – instead of having to rigidly stick to payment terms and wait to be paid, you effectively get paid much earlier in the process. This can provide a much-needed lifeline for businesses who have to wait for payment. A recent ISME survey reports that while 55 days is the average wait for payment, over two thirds of businesses experience delays of 2 months or more before they are reimbursed.
As soon as an invoice is raised, you send it to the finance provider, who will advance most of the value within 24 hours. Then, once your customer has made their payment, the remaining balance is paid to you, minus any fees. The two funding types that can benefit businesses are factoring and invoice discounting. The biggest difference between them being who collects the customer payments.
Factoring is an attractive option for smaller businesses, whose resources would be better spent on day-to-day activities. Because a dedicated credit control team collect your outstanding invoices, your time is freed up to concentrate on running your business.
Invoice discounting is similar to factoring, in that it gives you access to cash as you issue new invoices. However, the key difference is that you’re responsible for collecting payments, while your use of an invoice finance product will be kept completely confidential from your customers.
However, despite the potential benefits of using invoice finance, many businesses are unaware of this funding option, typically investing personal funds due to concerns about owing money with a loan or overdraft.
If you want to avoid borrowing money and owe as little as possible in debt, then invoice finance helps to bridge long payments terms and credit control prevents late payment.
The positive benefits of Invoice Finance can help your business to:
- Quickly increase your cashflow, without waiting for payments from customers
- Reduce the impact of late payments
- Alleviate administrative demands on your business with an outsourced credit control service
- Pay supplier invoices quicker and take advantage of early payment discounts
- Increase your level of funding as your turnover grows
- Grow by taking advantage of new opportunities
- Make much needed purchases
- Secure assurance over invoice payments
Invoice finance shouldn’t be seen as just a funding option for businesses that are facing cashflow problems. It’s a valid way of financing the day-to-day running of your business and taking advantage of growth opportunities. Whether you’re a start-up or looking to take an established and successful business to the next level, invoice finance can be an alternative and flexible option for you.
However, there are also a number of practices SME owners can put in place themselves to ensure cashflow challenges don’t arise, including the following:
Keep up-to-date records
Whether you have a finance specialist within your business or not, you should have some level of financial reporting so that you can keep a close watch on payment times. Keep an accurate and up-to-date record of your business’s cashflow so you can keep an eye on the movement of money to and from your company. This will ensure that you can identify payment issues earlier, helping you to take steps to resolve them.
Don’t forget to ensure that your invoices clearly state your company’s terms and conditions.
Offer payment incentives
Although this may not work for every business, payment incentives can sometimes encourage customers to make payment more quickly. You could offer an early payment incentive, giving customers a 5 per cent discount on their invoices if they pay promptly or within a few days of an invoice being raised.
Diversify your customer base
Although this is easier said than done in an increasingly competitive environment, ensuring that you have a good spread of customers is the best way of reducing your exposure to bad debt. Try not to have over 20 per cent of your business with one customer – if their business nosedives, yours will too from over-exposure. If you find yourself in this situation, try and drum up new business through networking, cold-calling or by ramping up your public relations and marketing.
Effective credit control
Before you begin working with a new customer, it’s important to do a little research beforehand. Do a financial check before offering them credit and ask for and check a selection of business references. Due diligence and effective credit control are paramount to understanding your customers and on-going monitoring can help you to identify potential signs of bad debt before the problem arises.
Consider cashflow funding and credit control support
An in-house or outsourced credit controller or credit control team can ensure you have effective terms and conditions with your customers, in addition to ensuring that outstanding money owed is followed up when required. In the long term, this will save you time and money as well as giving you peace of mind in the knowledge this risk is being properly managed and allowing you to focus on growth.