HOW INVOICE FACTORING CAN IMPROVE CASH FLOW FORECAST

by Mar 12, 2021Invoice Factoring0 comments

Entrepreneurs know that one of the keys to keeping doors open is planning. Two powerful business tools that can help small business owners plan for upcoming expenses, such as taxes, wages, and insurance, are cash flow forecasting and invoice factoring. They can even help companies get paid faster.

WHAT IS CASH FORECAST AND WHY IS IT IMPORTANT?

As any business owner knows, the highest paying customer is not always the one who pays the fastest. However, waiting too long for payment can cause cash flow problems that make it difficult to pay off debts, including payroll. Adding unexpected expenses to the equation can quickly become insolvent.

Cash flow forecasting is a method of predicting the future financial condition of your business based on accounts receivable and expected expenses. You can use cash flow forecasting to determine your financial position at any time and to effectively prepare for upcoming expenses.

Some expenses, like utility bills, insurance, and payroll, tend to stay the same each month. Other expenses, like unexpected repairs or a lawsuit, can take you by surprise. Although cash flow forecasting cannot prepare you for all financial scenarios, it can help you better prepare for potential shortfalls.

Cashflow financing is available to businesses that sell goods and services on a business-to-business basis, with no tiered payments.

This type of financing covers the financing gap that is created during the period from the issuance of an invoice to the buyer until the moment when the buyer pays for the goods/services.

Therefore, cash flow financing helps companies with the financing necessary to deliver buyers’ purchase orders. The main guarantee of the financing of cash flows is the sales invoices. Cash flow financing is also known as sales financing and includes specific financing solutions such as factoring and invoice discounting.

Cash flow financing uses a revolving credit line in which the new invoices received allow new funds to be made available. The source of income to repay the loan is in the settlement of pending bills by the debtor. This type of financing is also called factoring, invoice discounting, or sales/invoice financing.

Cashflow financing allows the company to release the money owed to it by its customers (accounts receivable) to finance the growth of the company or to meet daily financial obligations. The credit limit of the revolving line of credit is sanctioned based on the assessment of the borrower’s credit risk.

The two main types of cashflow financing are recourse or non-recourse. Recourse factoring assumes that the customer’s default risk is covered by the debtor (seller). On the other hand, non-recourse factoring assumes that the lender assumes the risk of the customer’s default.

In both recourse and non-recourse factoring, lenders support credit monitoring and collections by providing sellers with services that help manage the sales book by issuing statements and provide credit monitoring services through letters or phone calls. to buyers under credit control. However, there is confidential invoice discounting services for businesses that want customers to be unaware of the lender’s involvement. Its operation is simple, with limited administration, so the company retains all responsibility for managing customer payments and credit checks.

Common use

The most suitable companies for cashflow financing are those that provide tangible goods or services. It is usually used by companies that have a high level of working capital tied up in debtors. It is also used by growing companies looking to manage their working capital. Some examples are manufacturers, wholesalers, engineers, transportation companies, and labor recruitment service providers.

Costs

Non-recourse factoring is more expensive than recourse since in the latter the risk is covered by the lender. The main costs are

Discount charge – the characteristics are similar to interest charges, in which a percentage of the loan value will be charged on a base rate (usually between 2.5% and 3.5% on the base rate)
Service charge – A percentage of the company’s sales is charged and typically ranges from 0.5% to 3%. This charge will increase if default protection is also included.
Depending on the size of the entity, there is a cost of credit control for the company.

Time frame

Building the line of credit for the first time usually takes a couple of weeks. Once the line of credit is in place, most banks offer the ability to access cash electronically. Once the invoice is uploaded, the cash is usually available for withdrawal within 24 hours.

Advantage

working capital needs are lower for the company
no asset collateral is required as the main form of collateral is invoices
scalable financing that adapts to the rapid growth of a business
financing is available for start-ups
funds available within 24 hours of invoice issuance.

Disadvantages

the availability of financing will decrease as sales decline
may not be suitable for all business sectors
ongoing management is required to ensure funding availability.

HOW TO IMPROVE YOUR COMPANY’S TREASURY WITH FACTORING FINANCING

Financing through factoring is a great way for companies to improve their cash flow. It allows them to do so without incurring new debt and without having to wait months for their clients to pay their bills. Instead, they leverage their bills to generate immediate capital. Financing through factoring has been around for a long time. However, in recent times more companies are considering it because they have much fewer financing options than in the past.

Bank loan approval rates are around 25% for small business entrepreneurs. As a result, companies are forced to close or find other ways to get the money they need. This is a difficult transition for the business community and is requiring a change of scheme. For many years, borrowing was preferred and recommended method of generating capital for businesses, both new and established. Now, because that particular source has practically been depleted, companies must develop new ways of doing business. One of those ways is financing factoring.

Factoring financing can remedy a company’s cash flow problem by providing it with the money it needs right away. It is possible for a business to generate cash in as little as 24 hours. Factoring can be done even by startups with bad credit.

For those of you unfamiliar with the concept, I will give you an example of how this process works. The WeRAwesome company is in financial trouble. They have to pay employees and buy supplies, but they don’t have cash on hand. They need to generate $ 400,000 quickly. What the company has going for it is $ 700,000 in bills from customers with good credit. They decide to sell the invoices to a Factor, Factoring-Compass Group, which agrees to buy them for 90% of their value or $ 630,000. Now, WeRAwesome has the $ 400,000 you need and much more. Factoring-Compass Group will handle all invoice collections and will return the money to WeRAwesome, minus the fees and money already paid to them. Problem solved!

The above is an example of how factoring financing works. It allows companies to leverage their accounts receivable to get the cash almost instantly. Instead of waiting 30 to 90 days, the average time to pay an invoice, to receive the money owed to them, it is possible to obtain it in just a few days. Factoring is an ideal option for companies that need immediate cash and cannot afford to wait. It is also a great alternative to bank financing, which is not available to newer businesses and those with bad credit. In short, invoice factoring is an excellent financing option for small businesses.

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