Invoice financing (also known as 'debt factoring') is relatively unfamiliar amongst small businesses - but as a short-term cashflow solution, it could allow you to unlock the funds that your business needs to achieve its growth plans.
Most small businesses spend a number of years in the 'growth' phase of the typical business lifecycle (the part of the cycle which often puts the most strain on cashflow). The burden on cash can vary from business to business, but even less capital-intensive businesses will find themselves having to actively manage their working capital.
Whilst working capital management is one of the most important focus areas for a growing business, many small businesses are not taking advantage of all of the options available to them - often because many of these options are simply unknown to them.
Invoice financing has become more accessible to small businesses in recent years, and is a great solution for unlocking short-term cash. Invoice financing allows small businesses to obtain an advance on cash by selling their customer receivables (trade debtors balances) to banks, in exchange for immediate funds, often on the same day.
A bank will usually immediately pay your company between 80-90% of the total gross receivables balance which is sold to them. The remaining 10-20% of the receivables balance is then also paid to you in cash once the customer (or group of customers) settles their invoice(s), minus the banks' fee (which is usually a small percentage).
This can be a particularly useful way for businesses to manage cashflow, especially where they require immediate access to additional cash e.g. to take advantage of an immediate opportunity to purchase cheap stock; or, if the business offers long credit terms to its customers (and would otherwise need to wait a significant amount of time to realise cash on their sales).
But what about bad debts? The good news is that you will rarely need to worry about the issue of bad debts arising on sold receivables - this is because many of the financial institutions which provide invoice financing, include the cost of bad debt insurance within their % fee for invoice financing (or this is available for purchase, as an extra).
So if your business is struggling to manage its cashflow, then invoice financing is well worth looking into. If your business manages its books using Xero, then you will shortly (early 2021) be able to take advantage of an integrated debt factoring solution, which will be available through the platform. We shall provide a further update on the details of this, when further information becomes available.
Please note that the above article does not constitute advice, nor is it a recommendation or promotion for certain services or for certain companies. The above article is intended for information purposes only.
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