The economic landscape has become increasingly fraught, and many small businesses are experiencing cash-flow issues. You can go down the usual avenues to secure financing for your business. You can also pursue less traditional avenues such as niche lending facilities.
Global markets are increasingly uncertain and revenue streams have been choked up in many cases. Small business owners in NZ are turning to government stimulus benefits, rent relief from their landlords, and financial relief options from banks and other lending facilities to help them stay afloat.
Many small businesses are able to use government relief options or take advantage of relief options from their bank. Some small businesses are facing a more complex situation because they already have a preexisting level of debt, or they may not have experienced a rapid and significant loss of revenue, qualifying them for relief.
Ultimately, you always have options. You can look into niche lending facilities to deliver invoice financing or factoring.
Keep on reading as we elaborate on the difference between financing and factoring and the pros and cons of each option.
Takeaway points:
- Both invoice financing and invoice factoring are effective ways to manage cash flow for your small business
- Factoring opens up liquidity for your business by putting the financier in charge of debt collection from your customers
- Conversely, invoice financing keeps the business in control of the debtor relationship, giving the business ongoing access to credit based on outstanding receivables
Comparing the two options
You might need to mediate your cash flow due to tough times. You might simply want to free up your cash flow to take advantage of opportunities for your business.Invoice financing is also known as invoice discounting or receivables financing.
You can also increase cash flow for your business by reducing fixed costs such as rent, utilities, subscriptions, and business insurance. BizCover New Zealand is a great platform where you can compare multiple quotes from leading NZ insurers to make sure that you are not paying a cent more than you have to for your business insurance. You can compare and buy your insurance online, with policies being delivered to your inbox within minutes. This means that there’s no hassle, no paperwork and no delays.
So what is factoring? Factoring is a process where businesses sell their outstanding invoices to a specialised financier for a rice lower than their actual worth. This discount is calculated as a percentage of the invoice. It is unavoidable because these financiers need to apply a discount to mitigate the risks of uncollectable invoices as well as the advancement of funds.
This discount is typically between one and four percent. The facility might charge additional fees on top of this, as well as potentially charging fees for each transaction.
During the factoring process the invoice is assigned by the business to the financier, which means the debtor is made aware of the involvement of a third party in the debt collection process. This changes who receives the money when the invoice does get paid. During the factoring process,when the debtor pays the invoice, it gets paid directly to the financier. It is up to the financier to chase up invoices that are not paid on time.
Many small business owners enjoy not having to chase up bills directly, as they feel that this is confrontational and has the potential to erode trust with their clients. Factoring can also unlock liquidity fast.
Invoice financing works along the same lines as factoring, but business owners more control over the debtor relationship. Think of invoice finance as a similar idea to a line of credit for your small business. This line of credit is secured by 70-80% of the collective total of invoices owed to a business.
Different lenders will have their own cost structures and methods of accessing lines of credit. It’s easier to think of invoicing as having a structure more similar to familiar business financing options such as a regular business loan or overdraft. Invoicing activities don’t have to be disclosed to your customers, removing the middle man and keeping you in charge of your business’s invoicing and collection activities.
Take the previous scenario, where your business has $100,000 of outstanding invoices. You are able to secure 70-80% of that amount in invoice financing, which would give you access to $70-80,000. To access this money you will have to pay a small service fee, which is calculated as a percentage of your limit, as well as interest on the funds that you do withdraw.
What’s great about invoice financing is that you can access more or less funding, depending on your business’s needs. Your access to credit will increase as you issue more invoices. When invoices are paid by debtors, the funds are deposited to repay the amount outstanding.
Both factoring and invoice finance are great tools to increase your cash flow and free up funds quickly. Just be sure to engage professional advice to determine if either option is right for your business.