As discussed previously, mismanaging cashflow can cause a business to run aground, even if it's turning a profit. Failing to properly manage cashflow could lead to a turnaround and restructuring engagement or pre-insolvency advice. However, the good news is there are many ways to improve cashflow problems that arise. One of the most effective methods of stabilising a business is cashflow finance.
But many people – finance professionals included – are not completely clued-up on what this is, and how it works. Consider this your introduction to cashflow finance.
Cashflow finance, defined
There are several more specific names for services that qualify as cashflow finance: namely, factoring, invoice finance and debtor finance. These are processes where your customer invoices are 'sold ' to the cashflow financier at the time they're issued.
The financier then pays you a set amount (generally 80%) of the invoice value immediately, and then remits the balance of the invoice less an administration fee when payment is obtained from your customer.
This means that you as a company director spend less time chasing unpaid invoices.
This means that you as a company director spend less time chasing unpaid invoices, get immediate cash in hand, and can facilitate further growth in your business. It is a popular type of finance for businesses at different stages; startups experiencing rapid growth, businesses restructuring their affairs or where existing loans are being refinanced.
With some 4,500 Australian businesses now using debtor finance, debtor financiers are becoming more widespread, offering competitive deals and a greater willingness to finance distressed businesses undergoing a turnaround.
A Bibby SME Barometer survey has also shown that 22 per cent of small business respondents intended to cease working with clients that paid invoices late, while another 20 per cent wished to spend more time following up on unpaid invoices.
This creates a strain on ongoing business cash flow, and can give rise to debt management problems down the line. Cashflow finance solutions offer a fast and efficient way forward for business owners that can't wait the 30, 60 or even 90 days it can take to see invoices paid.
Cashflow finance as part of a turnaround and restructuring
These services are also useful in contexts other than spurring business growth. If other debts become an issue, cashflow finance solutions can free up money to proactively address issues your business is facing.
On top of this, if your company needs turnaround and restructuring services, these solutions can help. For instance in circumstances where a newly formed company commences trading, or purchases an underperforming business, the purchaser can use invoice finance to facilitate this purchase, streamlining the process and ensuring it is completed quickly.
Invoices can even potentially be used as security to obtain finance in a way that means your personal assets, like motor vehicles or the family home, do not become collateral at risk of being lost should business insolvency become an issue. It can also be used to fund a formal restructuring through a Deed of Company Arrangement (DOCA) process.
Cashflow finance can be both a proactive and reactive measure – it simply depends on the challenges of your specific situation.
Solving working capital issues
Sometimes it can arise that a business already has a line of credit or business loan, which is secured by the plant and equipment owned by the company. These credit facilities do not grow with the business and can become exhausted limiting the working capital of the business. When there is insufficient working capital to ensure smooth trading operations, cashflow finance solutions can provide an alternative way forward.
Debtor finance arrangements can function without bricks and mortar or plant and equipment security, which enables you to grow the business without worrying about securing a new loan from your bank or lender. Almost any time cash is tight and your company works with invoices, debtor finance can provide a solution.
Who typically uses cashflow finance strategies?
Anyone can engage in these solutions, but there are some situations specific to certain types of companies that mean they are well-suited for debtor finance.
Start-up businesses often do not have the base capital to continue growing, and invoice finance lets them continue paying their own suppliers as they get off the ground. It can also let small businesses with tight cashflow pay their own bills early, perhaps benefiting from early payment discounts.
As mentioned previously, generally any company that needs to quickly address its cashflow issues can make good use of these facilities. Manufacturing, transport, IT, wholesale and distribution companies are just a handful of examples of industries that benefit from invoice finance. On the other hand, cash businesses such as retail and hospitality are not suitable, and only a handful of debtor financiers will work with building and construction.
How does Cactus Consulting help?
Many people turn to the professionals at Cactus Consulting for assistance when their business experiences financial difficulty. Whether they require an informal debt resolution, turnaround and restructuring assistance or pre-insolvency advice, we help them work out a positive plan to guide their business toward success.
Debtor finance solutions can form part of a strategy, freeing up the cash businesses need to survive and grow. The Bibby survey indicated that SME owners' main reasons for borrowing in the next 12 months were for ongoing growth, refinancing already existing debt, or building working capital. The right professional advice can help you understand the most suitable option for your business. Call the team at Cactus Consulting to determine the best way forward for you.