What does a cash flow solution actually look like for your business?

It is often beneficial to visualise what a product can do for your business. In this blog I show you, in graphical form, the effects of both a full book and a selective invoice financing facility on the cash flows of both a new business and a business with a large growth opportunity.

In these examples, for the full book calculations I have used their industry average advance rate of 63%, while for the selective invoice facility (such as our “Single Factor” facility) I have used a typical 80% advance rate, however not all invoices are funded. Furthermore, I have also applied a fee figure reflective of real world situations – that is, the selective single invoice fee used is twice the fee for the full book facility. Note that this is not always true, as each facility is offered on a case-by-case basis, but you will see that it does highlight the fact that price is not the main factor in determining which facility is right for your business.

With a full book facility a client is typically locked-in to a contract of at least 15 months. In order to clearly see the effects of these types of facilities at the end of their term, the full book graphs below have been shortened to a smaller timeframe. I have also assumed steady and stable cash flows in the interest of clarity of the graphs.

New business example

With large establishment costs and few initial clients, some businesses can find themselves with cash flow gaps during the initial months of their business. The graph below illustrates this:

The red circles highlight time where the business has “negative” cash – i.e. their expenses exceed their cash reserves.

If this business was to commit to a full book facility, their cash flows would change as illustrated below:

As you can see, depending on the growth of the business during the full book financing period, when the financing facility stops the business may still find themselves with a cash flow gap. This is often the reason why many businesses get trapped into these types of facilities – they simply cannot afford to exit them. As such, they move from one full book financier to the next, without actually exiting a facility completely.

However, if the business utilised a selective invoice financing facility, their cash flows would look more like this:

Not only can a business manage their cash flows more carefully over a shorter period of time, but they can manage their exit funding so that they do not find themselves with a cash flow gap at the end of their facility. Furthermore, since the financing fee is charged only on the invoices financed, the business can see greater overall growth than they would with a full book facility.

Business growth step-change example

Let’s look at an established business which has an opportunity to grow rapidly over a short time period. In this example, the timing between the input costs to achieve the growth and the commensurate income result in a cash shortage in the business, as illustrated below:

If this business was to commit to a full book facility, their cash flows would change as illustrated below:

The business has managed to overcome their short term cash flow gap, but at the expense of a lock-in contract and paying for a facility across their whole debtor book. They have also placed their business at risk during the lock-in period – what if a contract fell through, or markets change? Cash flow finance is an accelerant – it can accelerate growth, and accelerate decline.

If the business utilised a selective invoice financing facility, their cash flows would look more like this:

As you can see, the business has managed to solve their immediate cash flow gap in a shorter period of time and they haven’t locked themselves into a minimum term contract.

Summary

When it comes to cash flow finance for your business, there isn’t a “one size fits all” solution. Depending on your needs, you may find that a full book facility works best for you, or that a selective invoice financing facility is best. To determine what is best for you, you must understand what your business needs and look at the complete cost of a facility, not just an advertised fee. As shown in the examples above, sometimes it is better to pay twice the price for a facility which benefits your business, rather than commit to a cheap facility which does not suit your needs.

Capitalise Business Finance offers a specialised invoice finance solution. We take the time and effort to understand our clients, so that we can tailor a solution specific for their needs. If you would like to find out more, or discover how we might be able to help you, call me now on 0432 866 132.