Businesses pay for cashflow disruptions in more ways than one. Temporary shortfalls can prevent companies from operating effectively, delay hiring of much needed talent or replacing outdated inefficient equipment. Not only this, SMEs find themselves stuck in a credit war between paying their suppliers on time and having to provide credit terms to their customers. Cashflow flux is a constant battle.
In order to preserve cashflow and address bottlenecks, businesses often look at reducing expenses and free up funds. But, this can be short sighted. Marketing and hiring campaigns that are cancelled or delayed will have to be made up at a later date. This results in sunken costs or the work needing to be redone. The largest cost, however, is the opportunity cost of the time that executives and business owners spend dealing with the cash flow problems; whether chasing invoices, restructuring projects, or planning for eventualities.
On a positive note, there are a range of different funding solutions and cash flow management tools that businesses can use to ease the pain. Invoice finance and supply chain finance are those that are most commonly used. Rather than having to take on debt or provide security against your businesses, these forms of finance are particularly useful as they use an existing asset and liquidity from the balance sheet of the business. This means that they can be set up with relative ease and efficiency.
Supply Chain Finance, also known as Supplier Finance or Reverse Factoring, is a set of solutions that optimises cashflow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their suppliers to get paid early.
In Supply Chain Financing, companies work with financiers to make payments to suppliers on their behalf. The financier then makes payments to the supplier while allowing the company to defer its own payments for up to 90 days. This extends the payment terms for the company while ensuring that the provider receives payments on time. In addition, suppliers may request advance payment of discounts.
The result is that suppliers can be paid more quickly while suppliers can hold their working capital longer. Until the payment is due, the company is free to use working capital which will be used in shipping payments to manage other costs.
Invoice Finance allows companies to release up to 80% of an invoice’s value as an advancement. Unpaid invoices are an existing asset within the business and Invoice Finance can free up cash whether on an individual basis or a percentage of the turnover and outstanding debtor book.
When the invoice is due, the funder will receive payment from the debtor before paying the balance minus the fee to the company.
These financial instruments allow companies to avoid the consequences of cash flow disruptions before they actually do damage. While some effort may still be required to track late payments, corners should not be cut, budgets should not be reset, and projects should not be cancelled. Most importantly, executives don’t have to spend time dealing with day-to-day financial matters, which allows them to focus and lead in the future.
Here at Accelerated Payments, we offer invoice finance on a selective basis which gives you even more flexibility on your cash flow. To find out more, please click here or speak to a member of our team.