How to free up cashflow when your aged debtors' report keeps on growing

March 1, 2023

Every company wants to get paid on time; if only it were that simple!

As you know, the reality is that your clients are more than likely dealing with late payments, unpaid invoices and a growing aged debtors report…and if they are, they’re not alone. According to the FSB, 78% of businesses suffer from invoices being paid late, and as a result it can put a real strain on working capital and cash flow.

As a bookkeeper or accountant, you’re often the first person your clients will turn to when finances are tight and they’re looking for ways to help unlock money that has built up in outstanding invoices. And while there are several options to consider, the right option isn’t always clear-cut.

Invoice discounting and factoring is one route that your clients may well be considering, in particular if they are looking to improve cash flow and build a bit more resilience around the business. Of course there are pro’s and con’s to both, but where invoice finance is concerned it’s important to be aware of the differences and mindful of any risks and impacts involved.

Invoice factoring – the best way forward?

The main benefit of invoice factoring is the fact that it enables businesses to sell their outstanding invoices to a third-party commercial finance company for instant cash, which can then be re-invested back into the company straightaway.

The factoring company will purchase the unpaid invoices from the business for a percentage of the total value. Notably, when factoring companies are involved, clients’ customers will usually be aware of their involvement; customers will start paying their invoices to the factoring company, and receiving communications direct from them, rather than the business itself.

Another key element of invoice factoring is that the factoring company will take on the responsibility of chasing, collecting and processing invoice payments, as well as full credit management.

Because of this, generally invoice factoring is considered less risky than invoice discounting because the factoring company takes responsibility for managing the credit control process themselves.

Invoice discounting – is it worth the added risk?

Invoice discounting is similar to factoring in that lenders will give a cash advance to businesses for a percentage of the total from outstanding invoices – usually up to around 85% - with the remaining balance settled once the customers have paid.

Discounting is often used as more of a short-term borrowing option and, while it can free up some instant cash flow, it’s important to acknowledge that the responsibility of chasing payments and collecting invoices still sits with the business. Unlike invoice factoring, credit control is not included as a service.

There is also less direct contact between the debtors and the business with discounting, with customers usually unaware that a third party finance company is involved. This means that the level of risk tends to be higher, which in turn can result in the selection criteria for invoice discounting being much tighter.

Whether or not that risk is worth taking for your clients’ business, will come down to various factors, including the size and scale of their company and profits.

Last resort or effective finance solution?

While a lot of people consider invoice financing to be something used only by businesses who are in trouble, as a ‘last resort’, it can, in fact, be a really useful way of improving cash flow, increasing resilience and fostering growth for businesses. Although, while it can provide a flexible means to unlock vital cash, it won’t necessarily be right for your clients.

Of course, as with any lending, it is important that clients are aware of any risks involved, and how they may impact the business, both in the short and long term. For instance, they should be aware that if the third-party finance companies are unable to collect payments for invoices, they will need to recoup that money eventually from the supplier business.

For a lot of clients, the fact that invoice financing could cost more in the long run than other borrowing options, coupled with it often proving difficult to adjust to running a business and managing cash flow, after using invoice finance, it won’t necessarily be the right recommendation for them.

So where does Paycada fit in? Well, Paycada was designed and developed to help XERO users get their invoices paid more quickly, without the need to change their existing accounting systems. A highly effective, low-risk solution to improving cash flow problems and managing invoicing, Paycada uses intuitive, personalised messaging, delivered to customers in a way they feel comfortable with, to encourage bill payers to settle invoices more quickly.

To find out more about Paycada, and how it can prove a really effective alternative to invoice financing for your clients, feel free to reach out and get in touch - I would welcome a conversation with you.

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