- 19 Feb
This Is Exactly The Problem Invoice Finance Solves
Whilst at an event the other evening, I met somebody that ran their own specialist clothing manufacturing company.
Financing Clothing Manufacture
They started telling me about how they were raising a small amount of finance for their business, via a crowdfunding site, but that there was a more significant problem that faced businesses like theirs, in the clothing sector.
Solving Late Payments
They went on to explain that one of the big biggest problems that stops them taking on new large orders is the issue of getting paid by the debtors, with the issues becoming more significant the more that the customer wants to order. What appears great news i.e. landing a large order, can turn out to be a cash flow problem.
Customers can take many days to pay outstanding invoices, over and above credit terms that may have been agreed. This puts a significant cash flow pressure on small businesses, that do not have the reserves to sit and wait for larger organisations to pay their outstanding invoices.
It struck me that this is exactly the problem that invoice finance he is set up to solve - yet as we often find people have not heard of invoice funding - so they are unaware that there is a solution. This was the case here, whilst crowdfunding was well known, invoice funding was unknown.
This pressure from late payments is one of the reasons why invoice finance is widely used within the manufacturing sector, and in particular within clothing manufacture.
How Invoice Finance Solves Late Payment Problems
The way that an invoice funding facility works is that when you raise your sales invoice, on credit terms e.g. 30 days, you receive a pre-payment from the finance company immediately - without waiting. This may not be the full value of the invoice (typically 85%), but it releases the majority of the value of the invoices so that you can pay your suppliers. In the case of a clothing manufacturer, this could be in respect of raw materials for example that are used to make the clothes.
Once the customer pays, the balance of the invoice is passed to you, less a charge for using the facility.
Bank And Beyond
The conversation went on to cover "is that a service that my bank are likely to offer?". This is a typical response that we get from small business owners. In the majority of cases they go straight to their bank for any financing service. The banks are able to provide great options, however there are also alternative and independent options beyond the banks that may have something else to offer. These should also be considered.
I explained that whilst banks do offer these types of services, there are other options that may offer some additional benefits to smaller businesses. For example, being able to operate a selective invoice financing facility whereby you can choose the invoices here to have funded, rather than being obliged to submit all your invoices for funding. This flexibility can be attractive to a small business that is just starting up.
This type of facility gives a small company flexibility to be dip into the financing when they need it, for example if they land a large order, without having the obligation to meet things such as minimum monthly fees.
If you are in a similar situation, and late payments from customers are affecting your cash flow, invoice finance is a simple solution that will solve the late payment problem.