The best business advice, opinion, news and expertise in Greater Manchester and further afield.

Friday, 1 April 2011

Friday Guest Blog

Paul Smith, Head of the Debt Advisory team at corporate restructuring specialists MCR


Maintain A Steady Cashflow With Invoice Discounting


Maintaining a steady cashflow is a key but difficult aspect to any successful business, especially in an economic downturn. The past few years have seen SMEs become particularly vulnerable to uneven cashflow as a result of late payments.


The Royal Bank of Scotland and NatWest have recently found that a quarter of the UK's SMEs cashflow problems are a direct result of customers paying bills between 30 and 60 days late. The figures, which were published at the end of January 2011 also outline that one in five SMEs are reported being owed on average between £50,000 and £100,000 a month in late payments.


Other figures from R3, the industry body that represents the UK insolvency practitioners, suggest that 27% of business collapses are because of another company going under, owing money.


It is clear to see how vitally important it is for any business to maintain tight credit control and debt collection processes to ensure that all owed money is paid on time. It is also increasingly essential that every business takes advantage of the solutions available to them and find what works best for them in order to help their company grow.


There are a number of ways in which most companies attempt to maintain a steady cashflow, including outlining a deadline in their payment terms and agreeing these payment terms in advance in written contracts. However, despite these procedures being put in place, it is rare that they are actually followed through with.


This puts SMEs in a difficult position as it is often the case that they don’t want to enforce late payment fees for fear they may lose important clients. Invoice discounting, a form of short term borrowing, allows a business to draw money against its sales invoices before the customer has actually paid it. To do so the business borrows a percentage of the value of its sales ledger from a finance company, effectively using the unpaid sales invoices as collateral for the borrowing.


Invoice discounting is a quick way to free up money, without changing your established credit control procedures. Unlike bank overdrafts, it’s a flexible facility that grows with your business, which may explain why bank overdrafts are in decline and invoice discounting is increasingly popular.


Invoice discounting is a potential credit route for firms struggling because of late payments. It involves selling invoices to a third party, who will provide credit and chase the debt on the businesses behalf.


With invoice discounting, the facility is confidential, and the business still retains responsibility for managing its own sales ledger, credit control and payment collection.


The advantages to this are that it gives your business an immediate injection of cash, usually within 24 hours which in turn enables you to pay your suppliers more quickly, and negotiate better terms as a result, taking full advantage of supplier discounts for early settlement.


The benefits of invoice discounting include:

• Improved cashflow: you no longer have to wait up to 90 days to get paid

• It's confidential – your customers will never know

• Up to 90% of invoice value available when you bill your customers

• The option to combine with Bad Debt Protection to minimise the risk against failing customers

• Cleared funds can be in your account the day after you raise your invoice

• You retain control over your credit control function

• Fast access to finance


Successfully maintaining a steady cashflow is increasingly difficult, especially for SMEs; the business where it is most important that they do maintain a steady cashflow. Finding the right solution for your company, ensuring that your debt management and cashflow are controlled is a business essential, which must not be overlooked.

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