Invoice discounting may save your business!
Most new businesses fail within the first few years, often due to a lack of working capital and pressure on cash flows.
“Once you have cash flow problems, you can forget about bank funding”, says Henk Rossouw, managing director of CapX Finance, “unless you have access to other cash resources, your business may be doomed forever.”
The main reason for cash flow problems is very simple – your clients demand payment terms of 30, 60 or even 90 days from the date of invoice, while your suppliers demand immediate payment. As a new business without a track record, you’re slap-bang in the middle and you don’t have any bargaining power.
By demanding extended credit terms, your clients are actually using your money as their working capital, while you cannot pass that burden on to your suppliers. The result is that you need working capital to cover all your expenses and supplies for a period at least equal to the credit terms granted to your clients.
Take, for example, a small transport business which provides services to one or two large clients. While the transport business has to pay immediately for expenses such as fuel, bank repayments, insurance, maintenance and wages, the clients only pay 60 days after invoice, which is rendered at the end of each month. This means that the small transport business is out of pocket for anything up to 90 days.
Invoice discounting provides a very effective solution for this problem. Once a client has signed off on a particular invoice (i.e. the client agrees that the services were indeed rendered to its satisfaction), the business may sell (“discount”) that invoice to a finance house which specializes in these transactions. The business immediately receives the invoice amount, less a discounting fee, while the finance house collects the full amount of the invoice from the client on the due date for payment.
The net result is that the business owner has converted its debtor into cash, allowing him to focus on growing the business by actually extending credit terms to prospective clients instead of worrying about cash flows from existing customers.
Rossouw says a finance house will focus on the credit standing of the debtor (i.e. the company paying the invoice) before agreeing to discount a particular invoice. The debtor must also undertake to pay the finance house on the invoice due date. The cost of discounting could be taken into account when invoicing the clients if appropriate, or simply be regarded as a necessary cost of growing the business which will be recovered indirectly from greater profitability.
To arrange invoice discounting is not a lengthy process nor does it involve a huge amount of paperwork. Once an application is submitted for the first time, it should not take more than a couple of days before payment can be made. Subsequent payments should take a few hours.
In a nutshell: Invoice discounting can save your business from disaster and provide the financial basis for solid growth.
Feel free to contact us for further information!