Getting Ahead of Cashflow for Business Success

Posted on 12. Sep, 2012 by in Business Wealth

Invoice discounting vs factoring

I think that one of the hardest things about running a business that deals with other businesses is the time it can take to get payment for services rendered.  It gets even harder when the transaction involves physical products, especially when you have to pay for them in advance yourself.  I’ve been in this situation before and it isn’t easy acting as a bank for someone else when you have expenses of your own to deal with.

The trouble that most businesses face these days is cash flow, so many rely on extended payment terms, often around 30 days and sometimes more. After the onset of the Global Financial Crisis in 2008 most banks seemed to switch off their offerings to many businesses which meant that they needed to access credit elsewhere, the end result was that each business would push their financial burden onto their supplier, who would pass it on again up the line as far as possible.  Instead of paying on or before 30 days though, the payment period was also stretched out, even if the terms were not.

In order to combat this and get money back into the business sooner, I instigated a discounting system whereby customers would get a discout on the goods if they paid in advance. After trying to sell the benefits of this to my customers (and in the case of some very large orders, insist upon it) I came to the realisation that most businesses were in the very same position that I was, they needed the means to make money before they could actually make it (and pay me as a result).  My discounting approach began to loose its appeal and our business cashflow began to dry up.

Fortunately there are a few avenues for small to medium businesses that can help with cashflow if done in the right way.

Small businesses that have trouble securing a bank loan do have an alternative to credit like factoring.  Factoring occurs when a business sells an invoice they have issued to a third party, or a factor, at a discounted rate.  Factors can make funds available, even when banks do not.  The main reason for this is because factors focus on the credit worthiness of the party paying the invoice, not  that of the business that issues it.  Essentially this means that you could offer goods and services to reputable businesses with greater confidence as your business would receive the much needed income without lengthy delays.

For larger business invoice discounting could also be a solution.  This process differs slightly to factoring because your business retains control over the administration of your invoices instead of passing the finance, debt collection and management services over to a third party. Both options have should be considered in terms of business fit, factoring might work because you can effectively outsource a portion of work. Alternatively invoice discounting might be a better fit because you want your customers to deal exclusively with your business and build your brand.

The obvious key to either system is to ensure that the rate you pay for this kind of service does not exceed the discount that you would offer customers for upfront payments, or at worst doesn’t significantly eat into your profit margin. For certain business this can be a very effective way to ensure you retain continuous cashflow.

Have you ever used an invoice discounting or factoring service?

Image by seanmcmenemy

Tags: , , ,

2 Responses to “Getting Ahead of Cashflow for Business Success”

  1. My dad worked over payroll and invoicing for years before becoming comptroller at his company and later CFO – he did these jobs himself!

    Reply to this comment
    • Money Cactus

      17. Sep, 2012

      I think having to take control of things yourself in a small business is good experience and practice. Knowing what is going on in all aspects of a business will keep you ahead of the game.

      Reply to this comment

Leave a Reply