How Do I Improve My Cash Flow? Invoice Discounting May Be The Answer
Invoice trading has become an established method for businesses to improve their cash flow and boost working capital. This type of finance appears to be particularly popular with smaller companies who may not own any major assets of their own, but who have a debtor book that carries commercial value in the marketplace.
This is a useful, short-term solution if you have large amounts of money owed to you over a 90-day period, you can bring all that money forward by securing the loan against it.
Companies who can wait between 30 and 120 days to be paid for work that has already been completed, can offer for sale one or more of their invoices to investors via one of the P2P invoice trading platforms. In return for accepting a discount on the total amount owed, the company can receive the majority of its cash straight away.
Meanwhile, investors who buy such invoices at the discounted rate wait until the full term is due to receive the full amount – the difference between the two amounts providing the expected profit element, or investment return. Thus, the cash-strapped company receives the money earlier than it otherwise would have done and the investor aims to make a healthy return. This type of funding avoids the need for small business owners to provide onerous personal guarantees that usually come as part of standard bank loan or overdraft.
Market Invoice, which has raised over £300m since its inception in 2011, bears testimony to the need and popularity of invoice trading. Those behind the concept, have taken invoice finance to a new level through developing what has become known as ‘Supply Chain Finance’ - a cost efficient way for even the largest companies to support and strengthen their supply chain without compromising their own financial status. It is a way for you to provide you with money upfront against your purchase invoices.
Supply Chain Finance is usually used when suppliers require payment upfront. The lender can pay a purchase invoice for you so that you can get goods or services and then sell them on to your customer where the supply chain lender will again step in and pay your invoice upfront and wait to be paid in your usual credit terms.
Both invoice finance and supply chain finance can be backed via P2P lending through companies such as MarketInvoice and Archover where investors can lend against invoices and purchase invoices
The process is fast, efficient and transparent. It can be more costly than other borrowing, however, it's very effective for a borrower and can make a good return for an investor, but of course be aware of the risks.
At its most sophisticated, invoice discounting can be used by any corporations to strengthen their supply chain while helping to protect their own financial situation. However, while this all sounds fine, there is risk attached to such transactions and things can still go wrong. For example, pledged funds may not turn up on time, may be reduced or, if the company due to pay goes bust, then perhaps the money may not turn up at all. Also, the companies in your supply chain may fail credit checks.
In the event of liquidation, any money owing to creditors may be delayed for months or even years and will almost certainly be reduced when pay day does eventually come around. And, of course, when things turn ugly there is also plenty of room for time-consuming and costly litigation. This is not to sound ‘doom and gloom’ – merely to caution that, whatever anyone says, these are investments that carry an element of risk.
Author: Sacha Bright & Oliver Murphy
Disclaimer
To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed.
