Use an invoice finance facility – but choose wisely.
Invoice finance allows businesses to get their money back into their business faster. When looking at the cost of invoice finance, it is important to remember that a dollar today is worth more than the dollar you get tomorrow. By getting funds back faster, businesses can reinvest those funds at their gross profit margin. Compound this month on month and it’s easy to see that the funding cost of invoice finance can easily be offset by the value of faster payments.
The biggest criticism of the different invoice finance models are the very stringent contracts that providers place companies under. We often work with businesses to try to find ways to exit contracts that no longer suit their needs. Sadly, this often means enormous exit fees payable to the provider.
For invoice finance to be of greatest benefit to a business, it needs to be ‘at call’. They can choose when they use it and when they don’t, without incurring penalties.
Analyse your client’s payments
Do you know who always pays late? Do you know who pays early? If you can see distinct patterns, then you can better plan your collection processes and expenditure. You may be able to shorten payment terms for clients who are happy to pay early. That way, you know money will be received within seven or 14 days and can plan to clear some of your accounts payable then. For clients who always pay late, you may want to talk about charging an extra few percent for overdue bills. This is always a difficult conversation given you want to maintain a good relationship with your clients. But if you approach the conversation on the line of this is a way to stop you needing to put your prices up across the board, then it can be an easier discussion.
However, if you do have clients who take so long to pay that your profit margin is eroded, then sometimes it can be better to exit those relationships. We all know that working for someone for free does not help profitability.
Look at your own supplier contracts
If you have a better grasp on when money is coming into your business, then you can also leverage when it goes out. Often businesses will try to delay their own payments, but this is really just delaying the inevitable. It can lead to added stress knowing you have a mounting pile of bills needing payment. But more seriously, if payments fall too far behind it can even mean your creditors launch insolvency action against you. But getting on the front foot instead can lead to cost savings for your business. For example, you may be able to negotiate a better deal with your suppliers. Most businesses (particularly small ones) will be happy to give you a discount if they know it means getting paid earlier. You may be able to ask for a five or even ten present discount if you pay your invoices within seven days. If you combine this approach with getting paid sooner through invoice finance, then your business can be well ahead financially.
Ask for help before taking on debt
In today’s market, it’s easy to be tempted to take on a loan. Even if the banks won’t lend to you, there are a plethora of businesses now advertising immediate approval for business loans. But do you really want a fast solution to what can turn out to be a long term problem? Fortunately there are lots of independent experts that can give you advice when cash flow gets tight. Finance brokers, for one can help you find a finance solution that will help you grow without becoming crippled by debt. They may be able to help renegotiate or consolidate existing debt. They can help you find equipment finance facilities, which may help free up additional capital. Plus, they can give you advice around entering into new finance contracts, such as invoice finance.
Automate invoice collection
You want to be able to get on with running your business and not spend all your time chasing payments. Plus, as humans, we often find it hard to ask people to pay us. Some businesses sadly exploit this weakness. So one thing that can help is automating collection systems. These can send friendly reminder emails or texts, provide payment options and even start the collection process. This gives your clients a gentle nudge to make the payment without you needing to have a difficult conversation.
Talk to Apricity today about how out invoice finance facility could help the cashflow in your business in the next financial year.