Problems With Cash Flow, Have You Considered Invoice Financing?
For a country that has evaded recession so effectively during the last two decades, Australia’s sudden flirtation with economic decline has come as a surprise to many.
After experiencing an unexpected contraction of 0.5% during the third financial quarter of 2016, the economy has stagnated further and caused tremendous concern to businesses. Now, the recent State Budget and worsening economic conditions have sent business confidence spiralling in South Australia, with some reporting the onset of recessionary conditions.
In this article, we look at how invoice financing can help businesses to overcome these challenges and lay the foundation for a more secure future.
What is invoice financing?
In simple terms, invoice finance is a low-risk form of credit which can be secured against your accounts receivable. So, rather than constraining your venture with 60 and 90-day invoice terms, you can instantly recoup the value of booked work by selling it to a third-party investor. This debt is then repaid when the client settles their bill, creating a short cycle of debt that is quickly completed.
To explain this further, let’s use the chair analogy:
Let’s say that you are a furniture importer who wholesales to fellow businesses, and you buy a chair for $20. You then sell this for $50, but the end-client has agreed on 60-day invoice terms, and this leaves you without the working capital to buy and offload another product. This is where invoice financing comes into play, as service providers can loan the balance of the invoice within a 24-hour period before the debt is repaid within the predetermined invoice cycle.
The benefits of invoice financing.
There are clear benefits to invoice financing, even for risk-averse entrepreneurs who typically like to avoid encumbering any type of debt. After all, the cycle of debt associated with this funding method is short-term, while there is also a defined way of repaying it within the predetermined time-frame. This provides reassurance and financial support to Small and Medium sized Businesses, without requiring them to burden their business or sacrifice any equity that exists within the firm.
Any initial costs or aversions to debt should also be outweighed by the boost that invoice financing provides to your working capital. It not only affords you the flexibility to take on clients who want to implement restrictive 60 and 90-day payment terms, but it also means that you can optimise your output and the full potential of your start up venture.
In short, you can maximise the amount of available working capital within your business at any given time, while never having to turn down orders due to a lack of cash-flow.
Invoice financing in the current economy.
While these benefits are applicable in any conceivable business circumstance, they have particular relevance in the current economic climate. With business confidence low and the economy teetering on the brink of a recession, Small and Medium sized Businesses will certainly be keen to minimise long-term debt and seek out organic growth wherever possible.
Invoice financing helps with this, as it is a flexible, short-term lending option that allows your business to realise its full, initial potential. It is also ideal for novice start ups, which have limited experience and minimal equity to yield equity to yield to investors.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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