Unlocking Working Capital For Your Business
In today’s fast-paced business world, managing cash flow is crucial to ensure you have the available capital to deploy for timely opportunities to maximise growth and maintain operational efficiency.
For many businesses, waiting weeks or months for customers to settle invoices can create financial strain. Receivables finance provides a solution, allowing businesses to unlock working capital by using unpaid invoices as collateral. Our guide below explores the various receivables finance options available to your business:
What is receivables finance?
Turning unpaid invoices into working capital.
Receivables finance is also more simply known as invoice finance. Invoice finance allows businesses to access funds tied up in unpaid invoices, before their due dates. This type of finance is particularly useful for businesses that offer their customers credit terms and need immediate working capital to cover operational costs, invest in timely growth opportunities or manage unforeseen expenses.
Types of receivables finance
Invoice Factoring
Invoice factoring involves selling unpaid invoices to a lender at a discounted rate. The lender advances a percentage of that invoice (typically 70-90%) upfront, with the remainder paid – minus fees, once the customer settles the invoice. The finance provider is also responsible for credit control and debt collection, reducing the administrative burden on your business.
Invoice factoring is best for businesses that want immediate cash flow and wish to outsource the associated administrative burden to the finance provider.
Invoice Discounting
Invoice discounting is similar to factoring, but your business retains control over credit management and collections. The finance provider advances a portion of the invoice value (for example, 80%), but your business remains responsible for making sure customers make payments. This option provides you more discretion than invoice factoring, as customers remain unaware of the financing agreement.
Invoice discounting is best for businesses with strong credit control processes and those seeking confidential finance.
Selective Invoice Finance
Rather than financing the entire sales ledger (receivables account), businesses can select specific invoices to use for funding. This provides flexibility, as businesses can use the service only when needed and on particular transactions.
Selecting specific invoices to finance is ideal for businesses that need occasional cash flow boosts without committing to full-invoice financing.
Supply Chain Finance (Reverse Factoring)
A buyer arranges for a third-party finance provider to pay their suppliers’ invoices early, benefitting both the buyer and the supplier in improving their cash flow. This helps suppliers maintain cash flow while allowing the buyer to extend payment terms without straining supplier relationships.
Reverse factoring is best for large businesses looking to support their supply chain while optimising their own working capital.
Benefits of receivables finance:
Improved cash flow
Tailored, flexible solutions
Reduced Credit Risk
Allows businesses to take on larger contracts
Reduced administrative burden (for factoring solutions)
Final thoughts
With the right receivables finance solution, businesses can turn outstanding invoices into working capital, enabling smoother business operations and greater financial stability. They key with receivables finance, is to choose a solution that aligns with your cash flow requirements and business strategy.
To speak with an experienced broker, get in touch with Mill Wood here.
