Many businesses are not aware of the many financing alternatives available. Far too often they run short of cash because of slow collections on money owed to them. This puts a serious squeeze on cash flow and limits the control you have in your business to secure profitable contracts, obtain large discounts from suppliers, or meet payroll deadlines. As a result, many firms stop trying to grow until they find more cash.
One financing alternative is “invoice discounting” or “spot factoring”; a service that is not as widely known in Canada but is a multi-trillion dollar industry around the world.
While banks take accounts receivable as part of their security and provide an operating line based on a percentage of the amount, invoice discounters actually purchase invoices at a discount and give you cash for them, usually within 24 â€“ 72 hours. Subsequent transactions can happen in less than 24 hours.
The cost of the service varies from company to company depending on the invoice size, the anticipated time of payment and whether the company has set-up or due diligence fees. The cost is typically more than bank financing. Businesses are willing to pay more because they essentially don’t have enough collateral or a long enough history to acquire traditional bank financing.
The result? You have immediate cash to get deals from your suppliers and finance new business, without waiting the usual 45, 60 or 90 days to get paid on old business. Counting on 30-day payment schedules is often a myth that buries new businesses.
Invoice discounting has also proven to be a more reliable method of accelerating payments than offering incentives to customers, such as a discount of 2% for 10 days. Customers often take the discounts but still pay in 25 to 30 days.
In completing due diligence, the invoice discounter will review your recent financial statements, including an aged listing of accounts receivable and accounts payable. You will also have to get sign-off from the purchaser to indicate they received and are satisfied with the goods or services rendered. Often, this sign-off is already part of the normal relationship between supplier and client.
Invoice discounting is not suitable for every business, but for the majority it requires no financial acumen but common sense to realize the best way to create improved cash flow is to spread risk. Invoice discounting doesnâ€™t mean turning your back on your bank or your account manager. Invoice discounting is an opportunity to get the best of both worlds by using a bank and an invoice discounter. Often a knowledgeable account manager who has had to say “no” or “no more” will suggest invoice discounting as an alternative because it relies primarily on the quality of your receivables, rather than the net worth of your business and collateral security. Then, once you’re through your â€˜cash-tightâ€™ period, your banker knows you are generally in a better position to secure traditional financing.
Rather than pushing your banker, invoice discounting may be an alternative to provide needed cash for your growing business.