There is a continued trend in the business climate that many large enterprises are happy to work with small and medium sized companies, but only on their terms. This essentially means that SME’s have to sometimes wait up to 90 days for payment. Clearly this can place an incredible strain on their essential working capital requirements.
Slow payers and cash flow management
When customers are on longer credit terms, it means that unless careful cash management is in place, small companies can risk not being able to replenish stock, cover core operating costs or even meet their key payroll commitments.
Small companies have to ask key questions if they face a potential large sale that requires longer terms.
- Do they take the order and risk working capital issues?
- Do they turn away the order and risk losing future business?
Invoice financing
This type of finance is ideal for small businesses, especially for those that may not have access to credit through more traditional forms such as Banks. This is because unlike a bank loan, which involves a variety of credit checks on your business, with invoice finance it is the strength and spread of your customers that is of primary importance.
Being able to release funds against a large percentage of your committed sales at an early stage, means the release of vital cash to free up working capital resources. This mean you are then in a better position to take on those new orders, and to ultimately grow your business.
In simple terms, it can be viewed as an overdraft facility secured against your debtors’ ledger. As long as simple checks confirm your ability to service the finance facility, the funds can be released on average within 2-3 working days.
Most new lenders in the market will normally now only tie you in to a 30-day rolling contract. Additionally, a number will also not restrict the lending facility against concentrated debt. See our example below.
Example: how this helped a client
Our client was involved in a long-term building development and began facing difficulties with their customer on the release of vital application funds. Clearly vital in order to progress on the build. They were looking to raise a facility of £350K.
We were approached to see if there was solution in the short term. Generally, this proves to be difficult, in view of the inherent issues within the industry, and the process of staged application payments’.
However, we were able to source a provider for them.
The lender, after speaking to us and our client, was able to successfully arrange the required facility needed, secured against the outstanding applications concentrated within this one specific customer.
In summary
Invoice financing can be used to extract liquidity currently tied up in outstanding customer invoices, but also staged applications, SAAS, maintenance and other licensing contracts. Releasing that cash injection earlier for working capital management.
This area of lending has become much more competitive, creating a much more affordable and flexible way of financing for your business.
I hope this has provided a basic outline. If you require any advice, whether you are just looking to start up, or are a current business owner, please contact Raffingers on 020 8551 7200.
Roy Butcher is an Associate Partner at Raffingers. Contact him directly at roy@raffingers.co.uk.