Providing adequate invoice finance could be the solution to successfully growing a business.
Often with small and medium sized businesses (SMEs) the largest asset on the balance sheet is the outstanding invoices. When looking for increased finance to grow a business a bank will look at the assets of a business as a means of security for a loan or overdraft. However if the assets are mainly in respect of outstanding invoices they would probably only consider say 40% of the value of the sales ledger balance (total debts outstanding) when deciding on the level of finance to make available. If the business is looking for rapid growth and needs finance against outstanding invoices in order to pay suppliers etc bank funding is probably going to be insufficient. The banks answer is that in these circumstances the business is over-trading i.e. it can’t pay its debts as they fall due. It needs to slow down its rate of growth in order to trade within its means.
However there is another way – FACTORING or invoice discounting. Factoring and invoice discounting offer invoice finance of upto 85% of the value of each invoice as it is raised provided goods or services have been satisfactorily supplied prior to the issue of the invoice. As stated it can be upto 85% of the value of the invoice but the normal percentage provided is 80% except in certain types of business such as recruitment agencies where it could be as high as 90%. The percentage advanced is against the whole value of the invoice inclusive of VAT. Thus an 80% advance would equate to 94% finance of the invoice value before VAT.
Providing a business has a profit margin of at least 10% it is probable that an 80% advance will raise sufficient cash to pay for the cost of production of the goods or services supplied. By using invoice finance provided by the factoring company the business is able to pay its suppliers in a timely manner and be able to make further increased orders to continue to grow. The invoice finance provided from factoring or invoice discounting will turn working capital tied-up in outstanding invoices into the cash flow needed to pay creditors on due dates and therefore allowing the business to avoid over-trading.
Combining the improved cash flow with a healthy profit margin and increased sales orders the business is in a position to expand and the cost of factoring can easily be absorbed in increased profitability. Additionally with increased purchasing power it may be possible to negotiate significantly improved terms and/or discounts from suppliers.