Receiving cash up front from customers is every business’s ideal scenario. That cash can be put back to work immediately, to invest, pay off creditors and generally help you better navigate the business through cash flow peaks and troughs.
But if you’re like most Australian small or medium sized businesses (SMEs), you’re probably offering trade credit terms and delivering products to your customers up front and then waiting weeks if not months for payment just to get the business. Of course, managing terms of trade requires a significant investment in processes, technology, people and management time to ensure that cash flow is well managed. What can be done?
Some less-than-perfect fixes
If your cash is running out, you might be tempted to tighten up your terms of trade and demand payment in 14 days, or even seven. You could also request deposits, but in competitive markets, you can’t do this without risking losing business to your competitors, who might be offering more attractive terms of trade.
You could seek external funding from your bank, but this means potentially having to provide security – maybe a mortgage over your family home with all the associated risks.
You could sell assets, but this means cannibalising the foundations on which your business is built on.
You could offer early settlement discounts to engage prompt payment, but at between 5%-15% (or even higher) of the invoice value these can significantly cut into margins.
You could bring in a partner to inject some equity, but sharing the blue sky that ownership promises often isn’t the wisest solution.
So you can either tighten up credit and cash flow management and risk losing customers, or look to inject funds through selling assets, losing equity, taking on a loan or discounting. Most will agree it simply doesn’t make sense to take out a long-term loan, offer discounts, gnaw at your resources, or give away future profits because of cash flow.
Could there be a middle-way?
Have your cash flow cake and eat it too with invoice finance
This is where invoice financing can be a smarter middle-ground solution to put the cash you have earned into your own account whilst you continue to offer attractive terms to your customers. The best of both worlds. How?
An Invoice Finance facility will advance typically up to 80% of the value of your credit sales upfront within 24-48 hours, with the balance of 20% returned to the client, less a small fee between 0.5% - 4%, when the customer ultimately pays your invoice. Invoice Finance is not secured by real estate security and the client can draw down funds as and when required putting them in full control of their cash flow.
This effectively means you gain access to the cash from your sales upfront as if you were trading on cash on delivery. Your customers remain happy and you are happy they can purchase more. Additionally, with cash upfront you can better fund the business’ day to day expenses, reinvest in growth initiatives, and manage cash flow.
At the same time the business can continue to offer competitive terms of trade to your customers to win new business and retain existing business. Additionally, invoice finance provides better buying power so you can take advantage of supplier discounts, new sales orders, and other market opportunities to really get ahead. Finally, you can avoid the not insignificant drawbacks of some of the alternative solutions to injecting cash into the business.
A smarter funding solution for small and medium sized business
Invoice Finance is not a new solution but it is growing in popularity as business owners and adviser discover just how versatile it is and become less willing to pledge personal assets to secure business finance.
The chances are your competitors are using some form of cash flow finance too. They may well have discovered this effective cash flow management solution and are using it to their competitive advantage, which you could be too.