Asset Based Lending Facility for Pearl Automative Ltd
4th September 2017

Cashflow is the key to creating a valuable business

Using single invoice finance to increase cashflow

In this article Dr P Singh of Cash for Invoices Limited-the specialist invoice finance provider explains the importance of cash flow to company value.

A valuable business is characterised by a cash rich company

Achieving this happy state is essentially knowing where to find cash and knowing how to increase it.  There are many sources of cash, but skill is needed in knowing where they are, their relative suitability, and getting hold of the cash.

Once obtained, cash needs to be invested.  There are many possible uses of the cash, but some will diminish it whereas others will increase it. Many people mistakenly choose the former instead of pursuing the latter.   Choosing the right mix of products or the right business sector will increase cash, however the wrong  products and sectors can diminish it

Cash invested might (probably will) diminish at times so its investment needs to be managed carefully so the end result is more cash not permanently less of it.

A key part of cash management is the ability to forecast it.

If cash levels are falling dangerously low, the management team should have in place contingencies.  These are likely to include several sources of additional cash, a common one being a bank loan facility or an overdraft facility.  Aside from banks, what else could a company raise its cash levels?

A common reason why cash levels decline is because of the cash conversion cycle.  Many companies invest cash to make, market, and then sell its products.  This process can take several months.  Many sales are credit sales, meaning the buyer (debtor) is given an invoice and allowed up to several months to hand over cash for the purchase.  The cash conversion cycle of initial outflow then inflow can create a significant cash gap.

This gap is normal however it needs careful management to avoid cash net balances falling below the level where the company becomes so financially distressed it is unable to recover and becomes insolvent.

How can the company increase its cashflow?

It could borrow, but that would increase interest payable.  The greater level of debt outstanding might make the company riskier and that might raise its cost of borrowing and so lower its value.

Another, though less commonly known, source of cash is for the company to factor its debts.

Debt factoring
Conventional debt factoring is a useful alternative to borrowing more debt.  It involves the sale of invoices (from credit sales) in exchange for immediate cash.  To manage the risk the debtors will not pay for their purchases (credit risk), the factor will purchase invoices for around 80% of their value and pay the balance when the debtor pays, less the factor’s fee.  The factor will usually also want a debenture over the company’s assets and possibly also directors’ personal guarantees.

Factoring fees can be of many types including arrangement, servicing, renewal, and credit protection fees.  These inevitably raise the all-in cost of factoring for the company, but its benefit are immediate cashflow without adding to debt levels, and transfer of credit risk to the factor (though some factors transfer credit risk back to the company if the debtor defaults).

Single invoice finance
Cash for Invoices Limited offers single invoice finance (sometimes called spot factoring or selective invoice finance) – a type of debt factoring that has key advantages over conventional debt factoring and invoice finance:

  • NO  No debenture or personal guarantee is provided by the invoice seller.  This makes the funding process less complicated, less expensive, and quicker to complete for the seller
  • NO commitment to sell an invoice. The seller has no obligation to sell its entire sales ledger to the funder.  The seller might be flush with cash at times yet with debt factoring it is forced to take funds from the factoring company, and pay associated costs of the facility.  This is inefficient and undesirable.  Single invoice finance from Cash for Invoices Limited requires no commitment so is far more efficient as a source of funds – used only when the seller wants funding.  Because there is no ongoing funding, associated costs are avoided.
  • Almost all types of businesses eligible.  Cash for Invoices Limited is available for many types of organisation.  In addition to limited companies, this includes LLPs, charities, social enterprises and academic institutions.  Single invoice finance from Cash for Invoices Limited opens up a new source of alternative finance for these organisations that might have found it difficult to find funding from other sources.
  • Sell just one  Since no facility is set up and no commitment is required to sell its entire sales ledger, the seller may sell just one invoice, and whenever it chooses.  With single invoice finance from Cash for Invoices Limited, the seller is in control of funding not the factoring company or bank lender.
  • One fee only  Since no facility is created with single invoice finance from Cash for Invoices Limited, there are no ongoing costs of financing nor none of the associated set up or termination costs
  • No recourse (beyond retention) if the invoice debtor defaults  If the debtor fails to pay on time, some factoring companies sell the invoice back to the seller and demand a return of money it gave to purchase the invoice.  Once an invoice, Cash for Invoices Limited retains credit risk
  • Credit protection included– some funders add a charge if the seller wants to completely transfer the risk of default by the debtor.  Single invoice finance from Cash for Invoices Limited does not charge extra for credit protection.

Many businesses could benefit from single invoice finance from Cash for Invoices Limited.  Its benefits are several:

Diversification – the credit crisis has shown that banks cannot be relied on to continue to supply necessary funding to businesses.  Having a panel of alternatives can keep businesses funded when one becomes unavailable.

Cost – not requiring legal security, a facility, and paying a plethora of fees make single invoice finance cheaper than conventional debt funding

Speed – not having to deal with the legal complexities of arranging charges, arranging credit agreements, and undertaking extensive due diligence, means single invoice finance from Cash for Invoices Limited can be substantially quicker to get funds for a business

Simplicity – many of the complexities that can be off-putting but necessary to get funds from conventional sources including debt factoring can be avoided by single invoice finance from Cash for Invoices Limited.  Even some single invoice finance providers require facilities so a business needs to be selective in its choice of single invoice finance provider.

Choice – unlike conventional funding and debt factoring, with single invoice finance from Cash for Invoices Limited, the business not the funder, decides chooses when it receives funding.

​For a free no-obligation quote on selling an invoice visit Cash for Invoices Limited