One of the most popular ways to alleviate business cash flow problems is to arrange an invoice factoring facility. This allows a business to effectively ‘sell’ its invoices to a finance provider as they are issued. Rather than waiting for 30, 60 or even 90 days for an invoice to be paid, an average of 85 percent of the value of the invoice is made available within as little as 24 hours of the invoice being issued to the customer. The business receives the balance of the invoice when the customer finally pays.

Why cash flow problems can cause insolvency?

The lack of cash flow is one of the main reasons businesses fail. Even successful businesses, without careful management, are never too far away from a cash flow crisis. Cash flow is the movement of money in and out of the business. Profitability might be the ultimate aim for a business, but without proper cash flow management, even very profitable companies can fail.

Cash is needed to run every business on a day-to-day basis to pay for expenses like:

  • Stock
  • Wages
  • Maintenance
  • Supplier payments  
  • Sales commissions
  • Rent
  • Equipment leases
  • Utilities
  • Taxes
  • And plenty more

Without the cash to pay for these expenses, businesses will be unable to pay suppliers, their workforce and even HMRC. This is not a situation that is tenable for very long. Soon, suppliers will cancel orders, finance agreements will be in default and debt collection action will begin.   

Alleviating cash flow problems

  • Factoring deals exclusively with business-to-business transactions
  • Factoring frees up cash for businesses with high cash needs
  • Factoring can be used by businesses of all sizes and in every industry sector
  • The factoring provider takes responsibility for the credit control process

What type of cash flow problems can invoice factoring solve?

Invoice factoring can help to solve a range of common cash flow problems businesses commonly experience. That includes:

Late payments

Late payments are one of the biggest problems facing growing businesses today, with 37 percent citing it as the main contributor to cash flow problems (pdf). Typically, it is larger customers that are paying small suppliers long after the payments are due. Rather than waiting for 60, 90 or even 120 days to be paid, invoice factoring frees up the money tied up in invoices so businesses can continue to operate and grow.

Rapid growth

Most entrepreneurs think that all growth is good, but rapid growth can actually bring serious problems to a business. Growing sales too quickly or getting a single large order with payment terms of 30, 60 or 90 days can lead to a serious cash flow problem. Invoice factoring solves this problem by freeing up the cash from sales almost instantaneously to support future growth.  

Long lead times

In industries such as fashion or retail, you can receive an order for X number of products on payment terms of 30-60 days after delivery. However, you then have to pay an overseas factory to produce the goods, which may take 6-8 weeks. That means the time from receiving the order to actually getting paid by the customer could be 3-4 months. Invoice factoring helps to alleviate cash flow problems during this time by freeing up money as soon as the invoices are issued. That allows businesses to take on new orders and continue to grow.

Poor credit control

Poor creditor control is a major cause of cash flow problems. Many small businesses simply do not have the time or resources to put a proper credit control and payment collections process in place. Failing to credit check customers or collect debts on a consistent basis can quickly cause problems. Invoice factoring providers take care of the credit control process on behalf of small businesses. This reduces the number of bad debts and late payments and frees up the business to focus on growth.  

Insufficient bank facilities available

The fact that banks have cut back the number of services available to SMEs and the ease with which they can be accessed, means many businesses experience a funding gap that leaves them unable to take advantage of opportunities that arise. Invoice factoring provides a flexible, scalable funding option that can be cheaper than bank overdrafts and other finance options.  

Suppliers tightening credit terms

Your suppliers may ask that payments are made in 15 or 30 days or even on delivery, but if your terms with customers are 30, 60 or even 90 days, this disparity could cause cash flow problems. Invoice factoring solves this potential shortage by freeing up cash to pay suppliers as soon as customer invoices are issued.