15 Jan Control Cash Flow – Invoice Finance
Small and large companies pay a great deal of attention to their cash flow. If there is not sufficient cash in the company’s accounts to pay salaries, buy raw materials, upgrade equipment and meet payments on loans etc. day to day operations can be affected. If they do not have sufficient cash on hand to meet these demands, many companies will delay their payments to suppliers etc. to help them meet their highest priority obligations. There is a solution – invoice financing to help manage cash flow.
What is Invoice Financing
Also referred to as Invoice discounting or invoice factoring, essentially companies are able to borrow funds based on a percentage of the outstanding invoices they have with their customers. Many customers may not pay their invoices for 30 days or even longer, creating a cash flow deficit for the supplying company. For a relatively small fee and / or interest charges, companies can receive a percentage of their outstanding invoices and use the funds for ongoing operations.
How can Cash Flow Improve?
In severe situations where there is insufficient cash to pay day to day expenses, a cash flow inflow from outstanding invoices could be the difference between insolvency and an otherwise healthy company. When you receive the funds, they can be used for whatever purpose is considered most expedient for the corporation.
Not all outstanding invoices can be considered as part of this solution. For example, small invoice amounts are usually excluded. Companies with a poor track record of meeting their obligations may also be excluded. Careful assessment of all outstanding invoices will ensure that your cash flow and your ongoing operations continue to flow smoothly.
Management of Invoice Financing Commitments
Many companies will choose to manage collection of the outstanding amounts from their customers even though they are using an invoice financing solution. It is important to them to maintain the customer relationship and not have a 3rd party collection service potentially jeopardize the customer relationship. In other situations, invoice collection is turned over to the 3rd party to arrange for collection services. This is an important decision and must involve the sales team who will want to ensure a long term positive customer relationship.
Other than collection of the invoice there is little impact on the customer. Invoices paid as per the terms of the original contract should be processed in the same manner. Customer payments will be directed to the invoice financing loan, fees and any interest charges. If collection action is initiated due to late payment, there could be some impact on the customer relationship and future sales. Regardless of who is initiating the collection activity, late payments by customers will need to be managed.
Invoice financing, invoice discounting or invoice factoring can be a viable cash flow management solution for many cash strapped companies who need to purchase equipment, raw materials and fund day to day operations. Instead of waiting for your customers to meet the terms of their contract, consider invoice financing as a solution. Call today to arrange further discussion on how this solution may be of assistance to your company.