Is Invoice Financing
Right For Your Business - 7 Questions To Ask
Yourself
By Anthony Wanjohi
Introduction
Are you considering invoice financing as one of
your business finance options? Have you been using overdraft, company credit
cards or loans and are looking for a different financing option? If you fall in
the above categories then there are seven questions that you must ask yourself
before making any decision. These include:
1. Are You Ready to Pay The Extra Fee?
Invoice financing, better known as invoice
discounting involves getting financing from an institution against your unpaid
invoices. Just like any other form of borrowing, it attracts a certain fee. For
invoice discounting, the fee is usually much higher than loans or overdrafts.
Therefore, before you decide to use this method, you need to make sure that you
have the capacity to pay the extra amount.
If you are not ready for the fees, then you can
opt for other direct financing methods which do not attract any
interest. These less costly options can include using a regular loan
or overdraft.
2. Do You Have Enough Collateral?
Using this method will give the finance company
a legal charge over your sales ledger. This way, your business will have less
collateral that may be important for other forms of borrowing. In short, you
will have fewer options for getting loans. When you have either an opportunity
or an urgent need, lack of enough collateral may make it very expensive for you
to get the adequate financing in good time. Even if you get some good
financing, the process may be more difficult compared to when you have enough
collateral.
3. Is Your Company Stable?
This type of financing is sometimes associated
with financial distress. It is a well-known fact that perception is a key
factor in business. Once people start getting the notion that you are in
distress, partners may tend to keep off from your business. It may also be
difficult to seal some specific deals. Additionally, some suppliers may just be
reluctant to give you any credit terms, therefore reversing the benefits of the
invoice financing arrangement in the first place.
Therefore, before getting into an invoice
discounting arrangement, ask yourself whether your company is stable. If it is,
then you need to decide if it is worth the risk to take on a financing option
that may affect the public perception of your company’s stability.
4. Do You Need Improved Capital?
On the upside, it is great to receive cash as
soon as an invoice is raised. This way your business will have continuous cash
flow and the general position of your working capital will also be improved.
After answering all the above questions and you still feel like this is the
right option, then you can gladly take advantage of the improved capital
position.
5. Do You Need Improved Management Time?
This is yet another advantage of invoice
financing. You end up getting more time for management since you save all the
time that you would have used to follow up on unpaid accounts. All these tasks
are taken up by the finance company once you finish setting up your invoice
discounting deal. This extra management time can then be spent focusing on your
core business, after which you can end up being more productive and profitable.
6. Are You In For Additional Cash Products?
We have discussed about the fact that a bad
perception can affect your business. On the flipside, using invoice discounting
also exposes you to additional cash products. This is due to the fact that you
receive your cash as soon as your orders are invoiced. You can then easily use
the cash to fund future orders, make capital investments and also get access to
cash flow loans and trade finance.
7. How Easy is
it for You to Exit?
Giving a finance company a legal mandate over
your invoice payments is great at first since you will be able to get the cash
quickly for use on your running projects. However, a time comes when you would
want to exit the plan. It can be very difficult to exit as there are many
processes involved that will take a lot of your time and energy.
Conclusion
Just like everything else, invoice financing has
its own advantages and disadvantages. There are many brands which have used
this option to propel themselves into unimaginable success. On the other hand,
there are companies that have failed miserably due to getting into this
arrangement without proper consideration. For you to succeed, make sure you
properly answer the above questions and get yourself adequately prepared
beforehand.
References
Wanjohi, A.M. (2011). Is
Invoice Financing Right For Your Business - 7 Questions To Ask
Yourself KENPRO Publications.Available online at http://www.kenpro.org/papers/is-invoice-financing-right-for-your-business.htm
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