The global banking credit squeeze and resulting pressures have seen businesses adopt new approaches to ensure working capital remains healthy, and one emerging tactic has been invoice discounting.
The rise of alternative finance is well known, and one shifting trend has been away from bank overdrafts and towards invoice financing. The method allows firms to unlock capital tied up in unpaid invoices – an issue compounded by late payment – and use it to fund vital day-to-day activities. The surging popularity of this finance option has been seen particularly in the UK, through providers such as Market Invoice who have handled in excess of £210million (€262million) worth of invoices since 2011. SMEs are benefitting massively from the increase in providers, as they are traditionally perceived to pose a greater credit risk and therefore face higher hurdles when pursuing funding through established means.
Beyond the UK, the market for finance through invoicing has grown steadily over the past five years, and in 2012 surpassed a value of €1trillion. This rise followed an increase from €844billion in 2009 to €991billion in 2010. Pleasingly for firms who have faced difficulties in the past, the shift to invoice financing has been embraced by the banks, rather than the traditional institutions pushing conventional and arguably outdated approaches.
As with any new stance on business finances, it’s important to consider all the options carefully before making a final decision. Invoice financing encompasses two main types - factoring and invoice discounting – and one may be better suited to your firm.
Factoring would see an external company pay you a cash advance and take control of managing and chasing payments due on your behalf. Invoice discounting works in much the same way, as a finance provider gives an amount of the accounts receivable total, but you remain in charge of collecting debts from customers. If you are a relatively new company, the former method may be more suitable, as you have greater control over the business relationship.
Invoice financing could be the solution to your firm’s cash flow concerns, and the positive experiences enjoyed by many companies today should prove the viability of this funding tactic.
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