Cashflow is key to the success of any small business. A cashflow finance solution is a way that business can leverage their accounts receivables to inject cash back into their business sooner. This is achieved via a third-party financier who reviews the accounts receivable ledger of the business to determine the cashflow expected to come into the business, based on the value of their current and outstanding invoices. The financier will then advance a percentage of the value of the invoice or invoices to the business on approval.
What is Cashflow?
The best way to define cashflow is to think of it as money flowing in and out of a business. Businesses will have ongoing expenses such as operational costs, payroll, overheads etc. which can be described as cash flowing out of the business. The business will also have invoices (or assets) which, when paid, can be defined as cash flowing into the business. Problems can arise though when businesses are unable to meet their ongoing expenses due to cashflow issues. Often the late payment of their invoices can have a significant impact on the profitability, and in turn solvency of the business.
Did you know?
According to a 2019 report on late payments by Xero:
Of all trade between small and large businesses from July 2017 to July 2018, an estimated 53% of invoices were paid late by big businesses. On average, payments were 23 days overdue. That 53% equates to a huge $115 billion of late payments. Xero estimates if those invoices were paid on time by big businesses it would transfer an additional $7 billion of working capital to small businesses each year.
The Impact of Late Payments
For many SMEs, winning a large contract or a big piece of business can feel like a dream come true. But for a lot of businesses it can quickly become a nightmare. Many SMEs will run into trouble keeping up with the demands of servicing their big client and balancing their existing obligations because of lengthy payment terms.
Perhaps the business has increased their labour force, hired equipment, purchased or manufactured a product to fulfill an order, but find themselves waiting 30, 60 or even 90 days for their invoices to be paid. This places significant stress on the cashflow of the business as they struggle to cover their operational expenses, while waiting for their invoices to be paid.
Here’s an example:
A small business supplying safety equipment for clients in the healthcare and construction sector won a large contract to supply a road and rail infrastructure project with protective clothing for all key workers.
This was a huge opportunity for them, with the capacity to double the size of the business for the duration of the contract (and beyond). The business needed to increase capacity to meet the terms and deliverables of the contract. They had to produce the equipment in bulk upfront – this meant more staff, more equipment and more storage.
To set up and deliver to the contractual specifications, the business needed an injection of cash. They quickly turned to cashflow finance to provide the solution. The financier was able advance a percentage of the value of the first invoice as soon as it was issued, quickly providing the working capital the business needed to take full advantage of their opportunity.
By maintaining the cashflow finance solution for the duration of the contract, the business was able to maintain steady cashflow throughout and deliver on their commitments, as well as plan for future growth.
The Cashflow Finance Solution
All businesses require a cashflow injection at one time or another. Perhaps they are just starting out and are trying to secure a bank loan to cover set up costs, perhaps they are looking at expansion opportunities and need to increase their production capabilities. Often businesses experiencing rapid growth will run into cashflow issues because they have exhausted their lines of credit, already mortgaged their house or built up a tax debt.
Many of the finance solutions available to small business are debt-heavy and often require personal assets as collateral. But a business cashflow finance solution relies mainly on the value of the invoices of the business. Working along the same premise as debtor finance, invoice finance or invoice discounting, the business leverages their accounts receivables to get their own money back in their business sooner, smoothing out cashflow.
Another key benefit of a cashflow finance solution is that the business is not putting personal assets at risk or taking on additional debt.
Could Cashflow Finance be Right for my Business?
Finance lenders are typically focussed on providing cashflow finance, invoice finance or debtor finance to businesses with favourable levels of growth and margins – as well as having high-quality debtors like blue-chip companies and government. As with any product however, it is important to weigh up the options and find the right one for you.
It’s important to remember, not all cashflow finance is created equal:
Terms such as ‘cashflow finance’, ‘factoring’, ‘invoice discounting’ and ‘supply chain finance’ are more or less used interchangeably. However, there are some distinct differences:
- Selective invoice finance: businesses have the flexibility to choose which invoices to fund, when and at what percentage (within prescribed limits)
- Factoring: in general, the financier will manage the entire debtor ledger of a business, including chasing payments
- Invoice discounting: the financier will advance a percentage of the face value of an invoice, often around 80%.
Choosing the wrong type of cashflow finance product can sometimes compound rather than alleviate cashflow issues, particularly if there are ongoing fees or lock in contracts.
What to Look for When Choosing a Cashflow Finance Partner:
Apricity Invoice Finance is a great solution for business looking for reliability as well as flexibility. Our product is selective invoice finance – a cashflow finance solution that allows businesses the flexibility to choose which invoices to fund, when and at what percentage (within prescribed limits). A facility like Apricity’s can have a stabilising effect on the cashflow of your business. Rather than being under the cloud of servicing a debt, you may find you are in better control of your financial situation, obligations can be met, and the long term can be planned for.