What is Invoice Finance? How can it be used as a cash flow management tool?

These are just some of the questions that our clients often ask the lending specialist here at ScotPac. To help answer your cash flow management related questions, we’ve put together this handy article just for you.

The Importance of Cash Flow

Effective cash flow management is an integral component of any business’s operations. As cash flow is the lifeblood of the business, managing it correctly or incorrectly can make or break one’s commercial success respectively.

Invoice Finance, a financial facility offered here at ScotPac, is one of the more innovative and accessible financial tools that small and medium enterprises in particular can benefit from. This financial solution can provide a much needed lifeline of working capital to ensure that businesses can overcome their liquidity challenges and get back to effective cash flow management.

What is Cash Flow Management?

Cash flow management is all about staying on top of the movement of cash into your business and out of it, in the form of revenue and expenses. This includes the monitoring of capital movements, analysing the sources and destinations of income or expenditure, and optimising that movement to make the most of every dollar flowing through the cycle.

Effective cash flow management will ensure that there is a sustainable balance between the funds coming in from customers and sales and the funds going out in the form of expense expenditure or investment in growth. Without proper management, there may not be enough liquidity to cover short term business obligations or even to take advantage of growth opportunities presented by the market.

To that end, ensuring you have the right cash flow management tool to keep your business solvent and responsive to opportunities or challenges is key.

The Right Cash Flow Management Tool

The right tool or financial facility will ultimately make your cash flow management easier to stay on top of and as streamlined as possible. There are a variety of different tools for different purposes. Real-time software tracking of income and expenses is one such tool, as are forecasting projections and analytical software. These tools allow for better financial organisation and greater visibility and insight into the financial health of your business. 

However, there is an additional cash flow management tool that can offer critical life support to your business by ensuring you’re able to supplement working capital when cash flow into the business pulls up short: Invoice Finance.

Understanding Invoice Finance

Invoice Finance, sometimes referred to as receivables financing as well, provides a line of credit type facility by leveraging the outstanding invoices a business is owed by its customers. Up to 95% of the value of the invoices can be provided upfront in the form of working capital with the remaining percentage (less any fees) provided once the invoices are settled. 

Instead of having to put up collateral in the form of assets like property, the business’ outstanding invoices serve as the security. To that end, Invoice Finance is among the more easily accessible and faster-to-access solutions out there for cash flow management. 

The Benefit of Invoice Finance for SMEs

As a small or medium sized enterprise, cash flow management can be challenging, especially when disruptions to your flow are caused by delayed payments from your customers. Invoice Finance solves this problem by ensuring near-instant access to funds so you can continue meeting your operational expenses or invest in growth opportunities. 

If your business experiences seasonal variations or other cyclical patterns that can affect the reliability or steadiness of the cash coming in, Invoice Finance can be a smart way to bridge the gap during the periods of low revenue.

Start-ups in particular who are looking to rapidly grow their business but may struggle to access the working capital needed, will benefit from ensuring a seedy cash flow in the form of Invoice Finance. 

Invoice Finance as a Cash Flow Management Tool

How does the financial solution that is Invoice Finance work as a cash flow management tool?

1. Access on Demand

There are cash flow management tools that are passive and merely allow you to track and analyse the working capital available in your business, and there are tools that allow you to actively tackle cash flow issues. Invoice Finance is the latter.

By accelerating your cash flow cycle through immediately accessible cash that otherwise would be tied up in outstanding invoices–and by extension tie your business up–you can manage the amount of cash flowing into your business on your schedule.

This empowers you to take advantage of growth opportunities, circumvent cyclical fluctuations and control a steady-state of working capital.

2. Predictable Flow of Cash

A lot of cash flow management involves forecasting cash flow coming in and anticipating expenses to make sure there is enough capital to cover the needs of the business’s operations.

With Invoice Finance, a predictable influx of cash–controlled by you and your business–can be ensured regardless of the timeliness of your customers’ payment. This enables you to better predict the amount of working capital that you will have access to and plan for your upcoming financial needs.

During times where you are strapped for cash, Invoice Finance can be used to bridge that gap, and when the cash flow coming into the business is sufficient you can choose not to leverage your outstanding invoices accordingly. 

3. Reduced Reliance on Credit

Lines of credit in the form of business loans incur interest costs and other administrative fees. While they are certainly beneficial for certain businesses in specific circumstances, they may not be the right option for you.

With Invoice Finance, you can reduce the need to rely on credit lines or loans, avoiding the associated costs, and freeing up the capital you’d otherwise have locked down to service the loan.

While business loans can be somewhat predictable, when market conditions, such as interest rates, fluctuate this can affect your ability to effectively manage your cash flow. Invoice Finance allows you to circumvent all of this.

4. Allocating Resources More Effectively

There are actually two distinct forms of Invoice Finance. Invoice Factoring is when you sell the accounts receivable to the third-party financial institution and with the sale the responsibility to collect payment from customers is passed onto the financial institution as well. 

With Invoice Discounting, the cash is borrowed against the outstanding invoices but ownership of the accounts receivable–and responsibility for collection–remains with the business.

Invoice Factoring allows businesses to outsource the collection process so that they can allocate the newly freed up time and resources to focus on core operations, growth opportunities or cash flow management in general. 

Cash Flow Management Tools for SMEs

Our lending specialists at ScotPac can tailor a financial solution to suit the needs of any business no matter how big or how complex. 

So, if you’d like to find out more about the fast and flexible cash flow management tool that is Invoice Finance, give the ScotPac team a call.