How to minimize invoice financing costs

Cash flow is one of the biggest challenges facing SME’s in Australia and is the number one reason for business failure. Xero recently conducted a survey and found that 45% of businesses had negative cash flow in July. Without positive cash flow, a business quickly runs out of money, and sometimes it’s those businesses in a poor situation that can find debtor payments harder to obtain. Profitability is one thing, but cash flow remains king.

Utilising a cash flow facility such as invoice financing can solve many problems for a business. The wrong type of facility, or a facility used incorrectly, can add extra strain on a business. The following is a brief list of ideas and actions that can be taken to minimise the usage and costs associated with invoice financing.

Utilise a cash flow tool that best suits your business

When it comes to invoice financing, there are many providers in the market with many different limitations and costs – it’s the limitations that can severely hinder your business, not the cost. The single most important feature when searching for a solution for your business is “how flexible is this facility” – does it allow you to finance invoices only when needed, and are you locked in to a term contract? By being able to finance only selected invoices, you can adjust your usage based on changing business conditions. Additionally, these types of facilities can be used to your advantage by offering payment options to your customers – this is covered in a seperate section below. Facilities that require you to finance all of your debtor book, or all of your invoices to a single debtor, can trap you into utilising debtor finance endlessly with no easy exit – be warned and be careful! Finally, don’t be fooled by advertising or a “race to the bottom” – cheap facilities can be very inflexible, very expensive with many hidden fees, and have funding limits that result in the biggest cost of all to your business – lost opportunity.

Know your cash flow position

Keeping your books up to date is easy with the many accounting programs available that can track your income and expenses. Coupled with your forecast, you will be able to identify in advance your cash flow position and any potential shortfalls, giving you the time to arrange the best solution for your business. You can minimise financing costs by knowing when you need to finance, and for how long – financing more that needed just eats away at your profits. Continuously utilising an invoice financing facility shouldn’t be “the norm” for a business – it should be utilised only when needed, and often this is during a growth period. When you only finance a portion of your invoices, the cost of the facility isn’t so important – flexibility is the key.

Be careful when providing credit

Would you take on a customer who has a poor history of paying suppliers? Late paying customers can severely damage your cash flows, forcing you to utilise your invoice financing facility to help your business, adding unplanned and unnecessary cost to your business. My clients often ask me to run a check on any potential new customer of theirs (public data, for free) so that they are better informed of who they are considering doing business with. Word of mouth and talking to other suppliers (reference checks) also helps in understanding who the customer is. If you are going to offer or accept payment terms, be sure to invoice quickly and correctly, and follow up immediately on late payments. On average, more than half of SME customers don’t ay their suppliers on time – you want to ensure that you are in the right half. At times when your customers are late in paying, a flexible invoice financing facility can be key in keeping your cash flowing.

Give your customer payment options or discounts

Offering early payment discounts to customers can be a quick and easy way to improve cash flows. I have seen some businesses offering huge discounts (up to 20%) to attract early payment – this is completely unnecessary since invoice financing should cost a lot less than that! A better approach would be to offer around 2% discount for payment within 10 business days, else full payment on the normal due date. By pricing your invoice correctly, you can still finance those invoices that are paid on the normal due dates and enjoy improved cash flows – you can have your customers pay your financing costs when they decide they want to! By offering early payment discounts at rates less than the cost of invoice financing, you can reduce the cost of improving business cash flows by avoiding the cost of invoice finance, however you  lose control of when to accept the discounted revenue as it would be your customers who decide when to take the discount – so be sure to only offer the discount at times when you need the funds.

Negotiate better terms or pricing from your suppliers

If you can negotiate extended payment terms with your suppliers you may not need to finance invoices to manage your cash flows. It costs nothing to ask. If your suppliers are willing to extend terms but at a cost, then you can weigh that cost against invoice financing. Alternatively, your suppliers may offer (or you can negotiate) reduced pricing for early payment of their invoices. Again, the financial benefit can be weighed up against the cost of invoice financing – it may be beneficial to finance an invoice in order to receive a larger discount on a supplier invoice. In order to take advantage of these offers you will need an invoice financing facility that allows you to finance only what you need and only when you need it. Again, as in nearly all cases, flexibility out-trumps cost.

In summary, there are many steps a business can take to minimise the costs of managing cash flows. In all of the examples given above, a flexible cash flow solution such as our invoice financing facility (no lock-in contracts, selective invoices, no hidden fees) will provide your business with an effective “standby” facility that can be called upon only when needed, thus minimising the cost of financing for your business.

Contact us today to discuss your needs and how we could help you achieve your business cash flow goals.