Smart money

Finance | Sat 24 Jan | Author – Business & Finance
Invoice discounting

We’ve all heard the expression ‘cash is king’ and anyone who has ever run a business will tell you just how true this is, writes David Banfield.

Managing your organisation’s cashflow effectively can make the difference between success and failure. With so many new businesses starting up and existing ones preparing for growth, this has never been truer than to today.

When a new opportunity presents itself – for example, a new client – it is essential that you, as a business owner, are able to act quickly to meet the new demand. This demand may come in the form of hiring new staff, expanding manufacturing operations or investing in new vehicles and machinery. Whatever it is, you can be sure you will require access to capital to meet the new demand.

While landing a big ticket client can be a complete game changer for your business, the harsh reality is that it often comes with lengthy payment terms.

Unless your  business has the necessary capital to sustain itself during this period, in addition to meeting the demands of the new client mentioned above, it will all be for nothing.

Securing finance

Unfortunately, since the economic downturn, SMEs have struggled to secure finance, which has had a detrimental impact on their businesses.

Banks are slow to lend, investors are looking for significant levels of equity and factoring can have a detrimental impact on client relations. Add to this the extended grace period of 60 to 90 days that many big organisations are demanding in their terms of payment and you can see how quickly the cash runs out.

Business builders, out of necessity, have had to find new and creative ways of managing their cashflow.”

Invoice discounting overcomes these issues, offering business owners quick access to capital, without the need for monthly repayments or giving up part of their company.

In its simplest sense, invoice discounting involves selling your unpaid invoice or invoices –depending on the amount of capital you need to raise – to a company at a discounted rate.

Invoice discount

Unlike factoring, you can often sell or discount a single invoice as opposed to your entire ledger with an on-going factoring arrangement.

In the past couple of years we’ve seen a significant rise in the number of small businesses – from construction and manufacturing companies to recruitment and IT solutions providers – availing of our services, and I expect to see it continue to increase in the years to come.

The reason for this is simple – these businesses have reliable customers, who pay on time but, for any number of reasons, they are considered too high a risk by the banks, perhaps because they are newly established or are engaged in an industry that the banks do not finance.

It is important to highlight that invoice discounting is not for everyone. In general, it is a service that is reserved for businesses selling to other businesses. More importantly, a business owner should only consider invoice discounting if his/her company has reliable customers, is fairly well established and, almost certainly, on the growth curve.

Building for growth

The economic landscape has changed dramatically over the past six years. Business builders, out of necessity, have had to find new and creative ways of managing their cashflow. While there’s nothing new about invoice discounting, the way in which we work has had to change to meet the needs of this new wave of entrepreneur.

Invoice discounting is growing because business owners want access to capital but they also want value. To satisfy this we need to be able to provide access to capital quickly, while still offering a competitive price for their invoices.

Moreover, we need to be flexible and willing to work with SMEs from a broad spectrum of industries, offering spot financing options to businesses that may only need our services once in a year, rather than scaring them away with year-long contracts.

Customer service and satisfaction are the drivers for any successful business and that holds true for invoice discounting and finance as a whole.

David Banfield is vice president of the Interface Financial Group.