In the narrative of business practice, productivity and profitability are the glamorous twins on which entrepreneurs pin their hopes. Meanwhile their sibling, cashflow, is left out of the limelight, powering the engine room. Without well-managed cashflow a business will struggle to succeed. Capital may be affected, resources drained, liabilities unmet and bills unpaid. That’s why the most clued-up businesses recognise the value of an efficient credit control operation.
However, there are other ways to manage your cashflow which don’t involve maintaining a permanent inhouse team. Invoice finance is an extremely efficient, low-cost method of keeping your cashflow healthy and consistent by effectively outsourcing your debt collection. It removes the uncertainties and allows you to make long-term financial plans.
What is Invoice Finance?
Broadly speaking, it is a way of monetising your company’s outstanding invoices. Instead of having to wait for payment, you can realise their value almost as soon as they are issued. There are two are forms of invoice finance, both available from Stellar Capital and both highly effective, but with a few significant differences in structure and operation. They are factoring and invoice discounting. The main distinction between them is where the responsibility for payment collection lies, as we’ll see. In either case, many businesses also elect to use bad debt protection as an additional measure, which is insurance against a customer’s ultimate failure to pay.
What is Factoring?
In factoring, a business will sell its invoices to a financial services company such as one of Stellar Capital’s strategic partners, known as a factor. The factor pays most of the value of the invoice immediately – anything from 80-90% – then collects payment directly from the customers of the business. At that point, the factor deducts a service fee and pays the balance to the business. This is a very popular option for smaller companies who may not have the resources to employ their own credit control team.
What is Factoring?
In factoring, a business will sell its invoices to a financial services company such as one of Stellar Capital’s strategic partners, known as a factor. The factor pays most of the value of the invoice immediately – anything from 80-90% – then collects payment directly from the customers of the business. At that point, the factor deducts a service fee and pays the balance to the business. This is a very popular option for smaller companies who may not have the resources to employ their own credit control team.
What is Invoice Discounting?
Invoice discounting has the same practical effect of giving a business immediate access to the cash value of its invoices. This time, the financial partner advances money against the amounts owed but the crucial difference is that unlike the factor, the finance company does not assume the debt: it remains the responsibility of the business to collect, which is very useful if there are any reasons of confidentiality or reputation that make it preferable not to disclose the involvement of a third party.
What Are the Benefits of Invoice Finance?
Invoice finance is becoming a widely used tool in business today and there are many advantages to both factoring and invoice discounting, some immediate and others longer term. The most obvious instant benefit is the no-strings boost to your cashflow. Even if customers are slow to pay, your cashflow stays healthy without the need to take on debt. By adding bad debt protection you can even transfer the risk of non-payment to Stellar Capital’s invoice finance partners.
With the pressure of credit control removed, you and your team will be free to concentrate on your core business, with the comfort of knowing that your financial security is in professional hands. It also means you’ll have much greater capacity to embrace new challenges and new opportunities.
A safe, reliable cashflow increases your spending and investment power. Putting money into system upgrades, assets and new resources becomes easier. Your purchasing power with your suppliers will grow and enable you to take advantage of discounts for volume buying and early payment.
Stellar Capital’s invoice finance partners also yield very valuable information about the credit status and performance of your customers. Analysing this data will enable you to avoid credit risks and adjust your debt position to spread your business amongst a higher-rated and wider class of customers.
Who Could Benefit from Invoice Finance?
This form of financing is particularly helpful for companies in their infancy or going through periods of growth or change. Start-ups frequently struggle to raise the investment needed to carry them through their first months of trading – poor cashflow at this early stage is the most common cause of collapse. With invoice finance, there’s no need to ride out those dangerous, barren early months of unpaid invoices.
If your business is established but you have ambitious growth plans, it can be hard to find extra funding but with the smooth, swift, regular injections of cash made possible by invoice finance, you can be far less reliant on outside investment or loans.
Entering new markets is a cherished goal for many businesses but it brings with it significant financial pressures. Once again, instead of relying on the uncertainties of third-party finance, it’s much safer to use the money tied up in your invoices, which Stellar Capital’s partners can release.
What We Do
Our mission is to help small and medium sized enterprises to meet the challenges of various situations with bespoke, innovative funding and finance solutions. Our experience and expertise makes us uniquely qualified to help with daily concerns such as cash-flow and capital equipment purchasing as well as larger projects including refinancing, corporate restructuring, mergers and acquisitions, company expansion and management buy-ins and buy-outs. Talk to us today. We can make your ambition a reality.
Invoice discounting has the same practical effect of giving a business immediate access to the cash value of its invoices. This time, the financial partner advances money against the amounts owed but the crucial difference is that unlike the factor, the finance company does not assume the debt: it remains the responsibility of the business to collect, which is very useful if there are any reasons of confidentiality or reputation that make it preferable not to disclose the involvement of a third party.
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