HOW TO MANAGE WORKING CAPITAL WITH DEBT – RECEIVABLES FINANCE

In the previous edition of this working capital series, I touched on the Overdraft as a means of managing the cash flow of a business using debt. This edition focuses on Receivables Finance.

Receivables finance (also referred to as Invoice Finance, Debtor Finance and Factoring) enables you (the supplier) to collect your invoices from your customers sooner than the agreed upon terms. For example, if you allow your customers to pay you within 60 days of them utilising your product / service, under a receivables finance arrangement, you could potentially have the lender pay you up to 80% of the invoiced amount before the invoice due date. The lender would then remit to you the remaining 20% once your customer pays their invoice.

Pros

  1. Does not generally require property security – This type of facility is generally secured against your receivables ledger;
  2. Does not appear on your Balance Sheet – Why this is important is because you may have loans with other lenders that have covenants restricting the leveraging of your balance sheet so taking out another type of loan may induce a breach of those covenants;
  3. Flexibility – You can decide which invoices you run through the facility and which ones you don’t. You may require the facility during peak cash flow strain periods, however not need to use it at all at other times during the year.

Cons

  1. Adjustment period – If you have never used this type of facility before, there may be an adjustment period whereby you may need to get accustomed to the platforms lenders use to facilitate the financing of invoices;
  2. Not all invoices can be financed – Usually, there may be some policies around concentration of a particular invoice (and the percentage it represents of the total receivables ledger), the payment terms (usually must be less than 90 days) and progress payments (the general rule is that the work must have been completed before you can request for an invoice to be financed).
  3. Disclosure to your customers – Some variations of factoring are fully disclosed to your customers, i.e. the lender will be contacting customers on your behalf to follow up payment of invoices. However, this is not always the case.

When used correctly, receivables finance facilities can assist businesses not only to overcome times of strained cash flow (by accessing funds earlier), but also to grow beyond the director’s ability to provide security.

However, if it is not the right solution for your business, you may find that you are not utilising its maximum potential (due to certain invoices not being approved for finance). It can then quickly become an administrative burden to you and your customers as it may require for you to change the way you invoice customers.

As always, if you need any clarification pertaining to the above, please get in contact especially if you don’t think you have the right facilities in place to suit your business’ cash flow requirements.

Disclaimer: The information provided herein is for general information purposes only and does not constitute specific advice. It should not be relied upon for the purposes of entering into any legal or financial commitments. Specific advice should be obtained from a suitably qualified professional before adopting any investment/financial strategy.