What is Cashflow?
Good cashflow management is the key to business health and success. To put it simply, cashflow is the difference between an organisation’s current assets and current debts. If there is a greater sum of earnings than current expenditures, this denotes a positive cashflow. However, if cash outgoings are greater than incomings, this signifies a negative cashflow. Possible earnings include payments from customers for goods/services provided or dividends from investments. Cash outgoings include the settlement of outstanding invoices, daily running costs of the business and employee wages, to name but a few.
It is fairly common for businesses to enter a period of negative cashflow. Sales may be seasonal, or the corporation may experience peaks and troughs in trade. However, various difficulties can arise from a negative working capital. After all, you are still required to pay outstanding bills and ensure that the day-to-day operation of your business is unaffected. It may be that you wish to make a large investment or fund a new asset, and so need access to emergency funds. In the long-term, a negative working capital could generate serious financial problems for your company.
Cashflow finance is a quick injection of cash to help you manage your working capital and budget. This is a short-term solution, allowing you to fund any daily expenses and continue to pay suppliers and employees.
There are various methods of cashflow finance available, which will be further explained below. These solutions all involve repaying the loans with added interest over a short period of time. It is important that you understand the finance provider’s terms and conditions, fees and interest rates before entering into an agreement.
This method involves selling your outstanding invoices (which become an “asset”) to a Factor. In return, you will receive a large portion of the cash upfront – typically, this is around 85% of the total value. You will then acquire the remainder of the balance once the outstanding invoices have been settled by the customer.
Factoring is particularly suitable for rapidly growing companies, although businesses of any sizes are eligible. Factoring provides instant relief from debt and quick access to funds – much quicker than waiting for customers to pay their outstanding invoices. The Factor will charge a fee for their services and will assume full responsibility for collecting any debts, meaning the intervention will be visible to your clients.
Invoice discounting is similar to factoring in the respect that it involves borrowing money to cover the costs of any outstanding invoices. However, you continue to oversee the debt collection process, and consequently your customers usually remain unaware of any financial intervention.
The finance provider will charge a monthly fee for their services, as well as interest on the sum borrowed. You will gain access to cash within just 24 hours, allowing you to promptly pay suppliers or employees, and ensure your business continues to function smoothly.
Hiring credit control experts to handle any debt collection takes the pressure off you and your business. A third-party organisation will act on your behalf and approach your customers to ensure that any outstanding invoices are settled, allowing you to focus on running your business.
Credit control is a favoured method of cashflow finance as it reduces time, effort and stress for the business owner. However, this third-party invention will be clearly visible to your customers – and again, charges will apply.
Trade insurance is certainly considered to be a sound investment. Insurance will protect your business’ working capital against customers who may fail to pay for services. Extensive cover will be provided for a variety of situations in which customers may find themselves unable to pay, including bankruptcy, ensuring that your business does not become majorly affected by any late repayments.
If you require short-term cashflow finance, then please get in touch with us here at ACF Direct. Our team consists of experienced financial specialists, who will work with you to choose the best option for your business.